Are you dreaming of building a new home from scratch? Want to build a new home that’s perfect for you and your family?
If you’re dreaming of living in a new home but want to ensure that it’s made exactly to your specifications, constructing a home can be a good option. However, you’ll need to know how new construction financing works and you’ll need to make sure that you can get financing for your build.
Fortunately, we’re here to help you out. In this complete guide, we’ll make financing a new home construction simple and easy.
Getting Approved For New Construction Financing
Before you start considering your new construction financing options, you need to be sure you’re ready to get approved. Be sure to follow the tips below if you want to have the easiest time getting approved for loans and getting great rates.
- Check Your Credit
If you want to get financing for a new home build, you’ll need to think carefully about your credit score. It’s important to get a credit report and to find out what your score is so that you’ll know exactly what you’re working with.
A lender will want to see that you have a good credit score when you’re seeking financing, so it’s important to know where you stand before you apply. Your credit score will affect the rates you get, so it’s important to check it and increase it as much as possible before you finance new home construction.
If your credit score isn’t up to snuff, however, you may want to consider other options. Looking for owner financed homes that don’t require a credit check may be the better choice for you.
- Know Your Finances
In addition to checking your credit score and getting an idea of where you stand with it, you should also think about the rest of your finances as well. When applying for financing, lenders will want to see documentation of your financial situation including your income, employment status, bank accounts, and more.
Be sure that you start assembling relevant documents as early on as you can if you plan to start seeking financing for a new home construction.
- Find Out What You Can Afford
If you want to afford a great new construction, you need to think carefully about how much you’re able to afford.
While you can sometimes get away with putting down a very small amount when buying a new home, you’ll typically need to put 20% or more down when financing a new home construction. You’ll want to be sure that you have enough for a significant down payment when you’re looking for financing for your new build.
You should also consider your debt-to-income (DTI) ratio carefully as well. If you have a lot of debts and monthly expenses to pay, you’ll need to ensure that it’s reasonable when compared to your income. Your DTI ratio can affect the rates you get and your chance for approval, so it’s a good idea to keep your DTI ratio at 35% or lower.
- Show Documentation For Your Build
In addition to gathering financial documents that prove your financial situation for your new home construction, you should also gather documentation that relates to the construction of your home as well. This may include documents such as a land deed, blueprints, contracts, and budget information.
Keeping great records and being ready to present the plan and schedule of your new construction is essential. This can help when it comes to getting approved for a great loan.
Understanding Your Main Financing Options
There are a couple of main financing options you’ll want to consider when constructing a new home. Here are the most likely paths you can take to get financing.
New Home Construction Loans
Construction loans are one option for financing a new home construction. These loans are useful if you’ll either be building a home yourself or hiring a custom home builder. They’re typically for the short-term and will usually last between 6 to 18 months. A construction loan could be either a single-close loan or a two-close loan.
A single-close loan, also known as a construction-to-permanent loan, is a loan that is primarily meant for the construction of the house. The loan will then be converted into a permanent long-term loan once the home has been built.
When getting a two-close loan, a loan will be used for construction but will be closed once a house is completed. Then, a new loan will be taken out for the home.
New home construction loans aren’t as common as typical mortgages, so you’ll have to do some digging to find a great lender. Community-oriented local and regional banks or credit unions may be your best bet.
Another good option for financing a new home construction is to get builder financing. In the construction industry, moderately sized and larger builders often have relationships with mortgage companies or may even offer financing on their own.
Choosing to get financing from a builder can be a good option for several reasons. Doing so can allow the entire process to be more streamlined. It may also be a bit easier to get approved.
Keep in mind, however, that builder financing isn’t always the best option because the terms may or may not be as good as a loan from another type of lender.
Using These Tips to Finance a New Home Construction
If you want to finance new home construction, you need to make sure that you take care during every part of the process. Be sure to consider your borrowing options carefully. With a bit of extra care and know-how, you’ll be able to build your dream home.
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