What you need to know when you’re building rather than buying
About 11% of single-family homes constructed in 2011 were custom built for their homeowners, according to the U.S. Census Bureau. Many people choose pre-constructed homes rather than custom-built homes, believing the building process to be too complicated.
Here’s what you need to know to help you decide which choice is right for you:
Save. Just like with any mortgage, you’ll have to come up with a down payment when building a home, but the down payment can be as low as the 5% minimum you’d need for a traditional mortgage, says Bob Brill, a mortgage loan officer with Independent Bank. Start with your local banker, as he or she will know the market. If you have to purchase land, you’ll need to figure that cost into the total as well.
Apply. In addition to the financial information you need when applying for a mortgage, you’ll have to provide a budget and a project plan with a timetable. “Just like for a purchase transaction, borrowers should be pre-qualified based on the anticipated cost of construction,” says Brill. “Once they have the contract and plans for the construction, we order an appraisal and move toward closing.”
Access. Your construction loan will likely be a short-term loan (typically a year) that could potentially have slightly higher initial interest rates than a traditional mortgage. You’ll draw on the money based on the stages of construction outlined in your project plan timetable.
Close. Once construction is complete, contractors have been paid, and your home has been inspected, your construction loan will be converted into a mortgage, and you’ll generally pay for just one closing cost.
Equal Housing Lender