With today’s economic trend setting real estate prices low, many assume that buying a used home is worth every dollar they spend. Others turn to apartment loans, thinking it’s like killing two birds with one stone: owning their own home and earning some extra money through rental income. While these are all great strategies, some families choose to get a construction loan and build the home of their dreams.
Although it may sound difficult, building your dream home is possible, as long as you understand how a construction loan works. Currently, the construction to permanent loan continues to be the most popular option. This loan covers full lot and construction coverage, and even converts to a mortgage the moment your dream home is established. Once you’ve established your down payment, all you have to do is make interest-only payments at a fixed interest rate. And once construction is complete, the loan will transform into a 15-year or 30-year fixed-rate mortgage.
Certain banks will offer interest reserve accounts that will allow you to make interest-free payments throughout the construction process. The bank will calculate the amount of interest-only payments and add the total amount to the overall loan. The funds will be deposited into a different account, which makes it ideal if you currently have pre-existing rent or mortgage payments on your plate. The licensed contractor you have hired will establish a “release schedule” detailing the monthly construction schedule with the necessary funds in tow.
Once you’ve determined that one of these new home construction loans is right for you, there are five quick steps to get you on the right track:
1. Know your affordability limits
You must determine how much of the total loan you can afford by using an online loan calculator. Remember that you need at least 20% of the down payment to avoid PMI payments.
2. Find lenders
Compare current loan rates from online lenders and local banks. Ask a construction contractor reputable by previous lenders they have worked with and get their contact information.
3. Get pre-approved
Read the pre-approval process for each selected bank. Describe closing costs and estimated tax rates. Ask for a copy of a pre-approval letter.
4. Find a contractor
Choose a trusted contractor who is licensed, insured, and experienced in building new homes. Calculate a budget plan, construction costs, and architectural drawings to get your home project off the ground.
5. Select the Land
Hire a reputable real estate agent to identify suitable land based on your budget. Check all possible building permits from your local municipality and make sure a water and septic system is available.
Once you have all five of these steps in place, you’re ready to build your dream home!
