Whether you are an adventurer, a handyman, or just a picky home buyer, the idea of build your own house could be an exciting prospect. After all, when you choose to build your own home, you have to decide everything. This means you can determine the precise layout, dictate the exact number and type of rooms, select all finishes, and even add an indoor pool, aquarium wall, or stair slide, for that matter.
While building a one-of-a-kind home might sound exciting, financing such a large business is a whole different story. Obviously, the majority of home buyers don’t have enough money to cover the cost of building their custom home, which means they’ll need a loan. Unfortunately, getting a loan for a self-build project is easier said than done.
Key points to remember
- If you are planning to build your own home, here are a few things to keep in mind when looking for a loan.
- Many people want to build their own Dream house rather than buying an existing property – but a traditional mortgage won’t help you make that dream come true.
- A construction mortgage is a loan borrowed to finance the construction of a house and usually only interest is paid during the construction period.sese
- Money is advanced gradually during construction, as construction progresses.sese
- Once construction is completed, the loan amount becomes due and it becomes a normal mortgage.sese
A standard mortgage won’t do
For buyers purchasing an existing home, it is relatively easy to get approval from a mortgage, as long as they have good credit and a reliable income. On the flip side, it’s virtually impossible to get traditional financing when building your own home. Why? Think of it this way: you are essentially asking the lender to fork out money for something that doesn’t exist yet. To make matters worse, construction is a risky process and lenders don’t like the risk.
Apply for a construction loan
If you are planning to self-build, you will need to look for more specialized avenues of financing. Enter the ready to build. Sometimes referred to as an auto-build loan or a construction mortgage loan, a construction loan is typically a short-term loan (usually the maximum of one year) used for cover the cost of building your home.
These loans usually have variable rates which are higher than the rates of traditional mortgages. Once your house has been built, you can either refinance the construction loan into a permanent mortgage or getting a new loan to pay off the construction loan (sometimes called the “”end of loan. ”)
Prepare to lay a lot of groundwork
As you prepare to apply for a construction mortgage, you should probably be doing some serious stretching. These loans require a ton of legwork on the part of the borrower. There are many hurdles you will have to overcome to prove that your home construction project is real, viable, and relatively low risk to the lender.
For most construction loan applications, you will need to provide the lender with a realistic project schedule and budget. You’ll also need to provide a full list of building details, including everything from floor plans and type of building materials to insulation and ceiling heights. (Experienced builders usually create a “blue book” that includes all of these details for a house building project.)
Prepare for a large down payment
At a minimum, most lenders require a advance payment on a construction loan, and some require as much as 25%. Why are the down payment requirements so high? Because construction loans are considered “riskier” than a traditional mortgage, and the lender wants to make sure you don’t stray from the project.sese
Know where you land
If you do not already own the land you plan to build on, the cost of the land will need to be included in the overall construction loan amount. If it is financially possible, try to pay the land up front. Otherwise, you will need to make a much larger down payment to qualify for the construction loan.
Work with a qualified builder
To get approval for a construction loan, you will need to prove that you have a qualified builder involved in the project. A qualified builder is generally defined as a licensed general contractor with an established reputation in the residential construction industry.
If you intend to act like your own general contractor or building the house yourself is a unique challenge – and you probably won’t be approved for a standard construction loan. In this scenario, you may want to direct your search to owner-builder construction loans. In today’s real estate market, it can be difficult to qualify for these types of loans; but it is possible if you provide a well documented building plan that demonstrates your home building knowledge and abilities. Don’t forget a contingency fund for unexpected surprises.sese
The bottom line
While building your own home from scratch can be an extremely rewarding process, getting a construction loan isn’t a walk in the park. To increase your chances of approval, develop a detailed project plan, involve a qualified home builder, and save enough money for a large down payment before you apply.