Securing a home loan can be a stressful process, but it doesn’t have to be if you have the right tools and take a few steps to prepare. First, it’s important to remember that custom home loans are different than home-buying loans: You’re essentially taking out a construction loan on something that doesn’t yet exist, whose final value won’t be known for months or years, and that will take a longer period of time to build. This means there’s a much higher risk for the bank, and, therefore, greater scrutiny and tougher requirements for you.
Here are some things to keep in mind if you’re considering a custom home loan:
Find A Specialist
Traditional home-buying loans are the same across the nation, with the same guidelines. For construction loans, every bank has its own approach. Even within a bank, specialists have different experience levels. Because it’s such a unique process, it’s best to work with a lender who has ample experience with custom home loans, who have learned from their mistakes, and who can anticipate issues and hold your hand accordingly.
Prepare For Tougher Requirements
From every angle, construction loans are harder to get, and borrowers need to be in better shape to qualify. You’ll need a bigger down payment (at least 10%) than you would with a traditional mortgage. Income level requirements and credit qualifications also are higher. A 620 credit score can buy a house but not build one.
One of the biggest differences between a construction loan and a home-buying loan is timing. Lenders need permits, county approvals, appraisals, and an architect before you can close the loan. Lean on your builder to help keep the oft-sluggish permit process moving.
Don’t Spend Too Much Too Early
Be careful if you’re tempted to get the site developed as quickly as possible; most banks require money in the reserve to prove your financial health, so if you spend that on an excavator and a good builder, you may use up that reserve.
Meet with your lender early and get prequalified, possibly even before you buy the lot if you’re paying cash for it. Get to know their program and how it works. Have them walk through the many different variables—such as whether you already own the lot, where the property is located if the property is a gift—that can influence your approval and the amount of your loan. And remember, just because you’re qualified for a home-buying loan doesn’t automatically mean you’ll qualify for a construction loan.
Choose Your Builder Wisely
The loan process is stressful, but experienced custom home builders, like Colorado Mountain Builders, can help ease some of the burdens by consulting with you on your total project—budgeting, planning, site development, and building—staying on schedule, and locking in a guaranteed budget in advance.
Settle On A Budget
If you know what you can afford, you need to stick to that. This means you might have to compromise on some features, but it will also ensure you’re in a home that won’t stretch you beyond your means. Above all, make sure you’re working with a builder, architect, and bank that fit your needs, even if it means shopping around. That’s a huge part of making everything go smoothly.
After Construction (Permanent) Financing
Once construction is complete, the loan will need to be transitioned into a permanent loan. There are a couple of options for this.
The first option is to refinance. In this case, the bank will put together a new loan application, order a new appraisal, and prepare a traditional home mortgage loan. The LTV will again be determined from the appraisal of the completed home and your strength as a borrower. Most banks have 10-, 15-, 20- and 30-year fixed interest programs as well as 3/1, 5/1, 7/1, and 10/1 adjustable-rate mortgages.
The other option I would strongly suggest is to combine your construction and permanent loans into a “One-Time Close” loan. Under this program, only one appraisal is required (before the construction loan). There is typically a predefined term (usually 12 months) for the construction loan, which may be interest only, and then the loan automatically converts into a permanent loan in the 13th month.
On-Time. On Budget. No Surprises.
Start with a builder. An experienced builder will provide you with a budget range for your total project. Then you can get in touch with different lenders to see what programs and loans they offer that will work for you.