Construction loans for brand new homes can either be obtained by the homebuilder or by the prospective homebuyer. Before the Great Recession hit, it was more common for the builders to have access to capital and take the responsibility of getting loans when necessary, but these days the homebuyer is typically the one left responsible for getting the loan.
Individual construction loans can be difficult to obtain if you do not already have a previous loan history, because there is a lack of collateral (in this particular case, there is no finished home). These types of loans also have unique guidelines associated with them, and they often include monitoring to ensure there is a timely completion of the job so you can promptly begin repaying the debt.
Most of the time, construction loans are short-term loans, with a maximum of a year. They tend to have variable rates that move up and down based on the prime rate. These rates tend to be higher than rates on permanent mortgage loans.
If you are to be approved in your application, you will need to provide the lender with a timetable for construction, as well as detailed plans for the structure and a realistic budget. You can get all of this from the builder or custom home designer in Canyon Lake, TX that you are working with. All of this information is typically referred to as the loan’s “story.” Keep in mind that delays in the construction process due to weather and the availability of labor and/or materials are quite common, so it is important to factor potential delays into your timetable.
Once you are approved for your loan, you will be put on a bank-draft schedule that closely follows all of the stages of construction. You are expected to only make interest payments during the process of construction. As funds are requested for the job, the lender will typically send a representative to check the progress of construction to ensure the timetable is being adhered to.
The construction-to-permanent loan arrangement
Once the construction process is complete, your loan liability then usually changes over into a mortgage. Ideally that arrangement would involve you only having to pay your closing costs once.
These days, lenders often combine the two loan arrangements into a single 30-year loan that has one closing, an arrangement known as construction-to-permanent financing. The bank has a much greater loan-to-value risk in this type of arrangement, so any prospective borrower looking to partake in such an arrangement must be prepared to put more money in. With the risk involved, the lender may only offer to cover 80 percent of the cost of the project, or even less. If you already own the land in question, it can serve as equity for the purpose of the loan.
For more information about the methods available to finance the construction of your new home, we encourage you to reach out to our team at HCBR. We’re proud to be a premier custom home builder in the Texas Hill Country!