With the current trend in the economy setting low real estate prices, many assume that buying a used home is worth every dollar they spend. Others get involved in apartment loans, thinking it’s like hitting two birds with one stone: owning your own home and earning some extra money through rental income. While these are all very good strategies, some families choose to get a construction loan and build their dream home.
Although it may seem difficult, building your dream home is possible, as long as you understand how a construction loan works. Currently, the construction-to-permanent loan is still 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 set your down payment, all you have to do is make interest-only payments at a fixed interest rate. And after construction is complete, the loan will transform into a 15- or 30-year fixed-rate mortgage.
Certain banks will distribute interest reserve accounts that allow you to make interest-free payments throughout the construction process. The bank will calculate the amount of the interest-only payments and add the total amount to the overall loan. The funds will be deposited into a different account, making it ideal if you currently have pre-existing mortgage or rent payments on your plate. The licensed contractor you have hired will then hand out a ‘launch schedule’ detailing the monthly construction schedule with the necessary funds.
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 need to determine how much of the total loan you can afford 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 reputable construction contractor about previous lenders they have worked with and get their contact information.
3. Get pre-approved
Take a look at the pre-approval process for each selected bank. Describe your closing costs and estimated tax rates. Request a copy of a pre-approval letter.
4. Find a contractor
Choose a reputable contractor who is licensed, insured, and experienced in building new homes. Calculate a budget plan, construction cost, and architectural schematics to get your home project underway.
5. Select the piece of land
Hire a trusted real estate agent to identify a suitable piece of land for your budget. Check the building permits you can get from your local municipality and make sure there is a septic and water system available.
Once you have all of these five steps in place, you are ready to build your dream home!