October 15, 2021

When the houses on the market don’t measure up to what you’re looking for in a home, building your own can be a great option. With a New Home Construction Loan from The Callaway Bank, you can design your own unique space that’s perfectly suited to your wants and needs.

The opportunity to build your own home to match your specific taste and functional needs is exciting! It’s actually a dream come true for most! So when it comes time to finance this project, our expert Mortgage Lenders are ready to make your home construction journey a breeze. We work to simplify the process as much as possible and provide you with the best lending options to get your new home built and ready for you to move in.

While we can’t say if you should go with brass, silver, or gold fixtures, we can help make your Home Construction Loan process as pain-free as possible.

Understanding a New Home Construction Loan

Many people don’t realize that getting financing for new construction requires two loans: first the construction loan itself, and then the mortgage for the completed house. A construction loan is a short-term, interim loan used for new home construction, and once the house is completed, you work out permanent financing.

Having two loans means double the closing costs, which include the origination fee, appraisal, title work, etc. However, on the permanent loan, we do reduce some of those fees because some of the work is done with the initial construction loan.

For instance, the origination fee is 50 percent of the normal charge the second time around. If completion is within 12 months of construction, we may not have to do a full appraisal and can do a completion certification at a reduced rate. Those things help make the process a little easier for borrowers.

Down payment requirements for New Home Construction Loans are also different from other home loans. We typically lend up to 80 percent of the appraised value on a construction loan, whereas on a purchase of an existing home, we can lend up to 100 percent on some loan types.

The down payment for a construction loan can be difficult for some borrowers unless they have equity in the property they are building on, or have cash in hand. They can also build up “sweat” equity by building the house themselves and saving on labor costs they would otherwise incur as construction labor. This financial hurdle is a large reason some choose to avoid home construction loans and opt for a home loan on an existing home — giving them more financing flexibility. 

How to Know If You’re a Good Candidate for a New Home Construction Loan

When you apply for a loan, the most important things we’ll look at are your credit and debt-to-income ratio. It also helps if you have money set aside in savings, because it’s likely you’ll need to put some of your own funds into the completion of the project.

It makes it easier if a borrower has either been given the land or bought it several years before and paid it off or down quite a bit to build up equity. This can essentially be your down payment instead of cash. Keep in mind that job changes or big financial changes like starting a business during construction are not a good idea, as these can cause problems with the final loan. 

In general, the 28 percent rule exists as a yard marker for individuals looking to obtain a home loan. The rule advises that your monthly mortgage payment should not exceed 28 percent of your gross monthly income. Sitting down and talking with your financial advisor, spouse, or friend, is helpful in mapping out what kind of budget makes the most sense for you, your financial obligations, and your lifestyle. From there, you can then make an informed decision when seeking a construction loan from a lender.

If, after reading this, you think you’re in good shape, you can start the process of applying for a New Home Construction Loan!

Taking Those First Steps

The first step is submitting an application for a Fast Mortgage Quote so we can check on your credit and your debt-to-income ratio. At the application stage or soon after, we will request bids, plans, or estimates for the new home and from the contractors involved. You can’t plan for everything (and borrowers will often make changes during construction), but we try to limit complications by getting all this information ahead of time.

Once you submit an application, you can look at acquiring the land if you do not already own it, and then start on the house plans, bids, and estimates from contractors. Do thorough research and get several bids to be sure you are getting what you expect at an appropriate price. Be sure to find a builder you not only trust but can also communicate with well.

A good relationship can save you from serious problems popping up in the middle of construction. You want to be on the same page with your builder before you break ground. Construction is generally a short-term, interim process and a large investment for the borrower. There can be cost overages, and everyone needs to be prepared for if and when something comes in higher than expected.

As your New Home Construction Loan is approved and the building begins, keep a realistic time frame in mind. Some customers tell us they’ll be done with the house in five months, and it ends up taking an entire year. Finishing a house in even six months is not only an incredibly rigorous timeline, but extremely rare for almost any builder. Things come up with builders, supplies take longer to arrive than expected, weather impacts timelines, and surprises can happen to anyone, so be prepared for setbacks and plan accordingly. 

Real estate is still considered one of the best and safest investments to make. During the pandemic home values across the nation have skyrocketed, and people are just as eager to build new homes as many Americans are currently seeking New Home Construction Loans.

Whether you decide to build a house, or you find a perfect home on the market, we want to help make the process as smooth as possible. Please reach out to one of our Mortgage Lenders or visit our Mortgage Resources Page if you have any other home buying questions. We’re here to help your home-owning dreams come true!

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