Are you feeling overwhelmed by the thought of taking out a loan to finance your custom home purchase? If so, know that you’re not alone. The good news is that there are several potential loan options available to help make this dream come true – all while minimizing the stress and worry associated with financing such a significant endeavor. You’ll want to arm yourself with knowledge, though, in order to be sure you understand all of the benefits and drawbacks associated with a custom home loans. Read on for some important things you need to know about this type of funding before making your decision!
Making the Decision to Build a Custom Home
Deciding to build a custom home is an exciting one! Maybe you have been looking for a new home and haven’t found anything that quite fits your needs, or perhaps you have lived in your current home for a while and know that it just isn’t quite the right fit for your lifestyle or future needs. Whatever your reasons, if you are considering taking out a loan to finance the purchase of a custom home, you need to be aware of the unique benefits and challenges associated with this type of funding.
Types of Custom Home Loans
When it comes to financing a custom home purchase, there are several loan options available. Depending on your current financial situation and credit history, you may be able to take out an FHA loan or even a conventional mortgage loan. However, if you don’t qualify for those types of custom home loans, you may want to look into alternative financing, such as an adjustable-rate mortgage (ARM) or a bridge loan. Each of these has its own unique set of benefits and drawbacks, so be sure to do your research before deciding which one is right for you. Let’s look deeper at the different types of custom home loans!
Construction Loans
To finance your custom home, you’ll require a specific type of loan called a construction loan. However, not all banks or financial institutions offer such loans. You can consult a trustworthy custom builder who can guide you about which banks offer construction loans and even facilitate obtaining the loan.
Construction loans are short-term, usually lasting between 12 to 18 months, depending on the project size. You’ll need to pay at least 20% to 30% of the total loan cost as a down payment to get the loan. If you opt for a 12-month construction loan, you’ll need to pay a sizeable down payment, and the interest rate might be higher than your permanent financing (mortgage) based on your creditworthiness.
There are a few different types of construction loans, including:
- A Construction to Permanent Loan: This type of loan is used to finance both the building and long-term mortgage. When construction is complete, your loan will be converted into a permanent mortgage with a fixed interest rate.
- A Standard Construction Loan: This type of loan is more like a line of credit. As the builder completes each stage, you'll need to make payments on the interest and principal balance. Once construction is completed, you'll need to refinance into a permanent mortgage.
- Renovation Construction Loans: Although we are discussing custom home loans and building a home from scratch, renovation construction loans can fund significant home renovations. These are typically short-term, and the interest rate is usually higher than a traditional mortgage loan.
Lot Loans & Land Loans
If you are building a custom home on your own land rather than buying an existing piece of property with the house already built, then you’ll need to take out two separate custom home loans: one for the land and another for the construction loan. That’s why it is important to know exactly how much money you’ll need upfront before taking out any loans.
Lot and land loans are typically short-term, lasting only a few years, while construction loans vary depending on the size of the project (12 to 18 months). Lot and land loans usually require a down payment of at least 20%, but it is possible to find lenders that offer lower down payments or even no down payment options. Make sure you understand all the terms and conditions of the loan before signing any agreements.
Mortgage Based Custom Home Loans
To obtain a completed home, you will eventually need a mortgage, which is a permanent loan. However, if you have already obtained a construction-to-permanent loan, you won’t be required to pay additional closing costs. The same is true if you obtained a standard construction loan and then refinanced the total cost of the home when construction was complete.
Mortgage-based custom home loans also come in different forms, including FHA, USDA, VA, and conventional mortgage loans. Each type has its own requirements, such as credit score and debt-to-income ratio, so it’s important to understand the different types and how they could affect your eligibility.
Understanding the ins and outs of custom home loans and financing is essential in order to make an informed decision about what type of loan best fits your needs.
Terms for Custom Home Loans
All custom home loans has its own set of terms and conditions that you must be aware of before signing an agreement. Make sure to read the fine print carefully, as certain fees or other factors could increase your total payment amount or shorten the length of time in which you can repay the loan. Here are some of the different terms for custom home loans that you should be aware of:
- Availability: Due to the potential risks and uncertainties involved, many banks and lenders used to avoid providing financing for custom-built homes. However, as the housing market has grown and there is a greater demand for self-builds, there has been an increase in financing options specifically for construction projects.
- Down Payment and Loan-to-Value Ration: Financing a custom home will require a down payment, and the loan-to-value ratio (LTV) can vary depending on the bank or lender. Generally, banks will require at least 20% of the total cost of the home as a down payment with an LTV of 80%. Interest Rate: Depending on your creditworthiness, you may be able to secure a competitive interest rate. However, construction loans tend to have higher interest rates than traditional mortgage loans, so it's important to compare multiple lenders before making a decision.
- Loan Duration: Most custom home loan terms range from 12-18 months, although it is possible to secure longer-term financing depending on the project size and the lender. Be sure to read all of the details carefully so you know how long your loan duration will be.
- Interest Rates: Interest rates can vary depending on your credit score and the type of loan you choose. Construction-to-permanent loans have higher interest rates than traditional mortgage loans, so it is important to research and compare different lenders for the best rate.
- Amortization and Payments: The length of time you have to pay off your loan and the type of payment schedule will depend on the loan product you choose. You may be able to find a lender that offers an interest-only option, where you only pay the interest each month, or a fully amortized loan with regular monthly payments.
- Collateral: Depending on the size of the loan and other factors, your lender may require collateral in order to secure the loan. This could be in the form of a second mortgage or a lien on a separate property you own.
- Underwriting and Processing: Every lender has their own underwriting and processing procedures in order to approve a loan. This process can take anywhere from a few days to several weeks, so it's important to plan ahead and understand the steps involved.
Understanding Custom Home Loans with the Help of BRH
Custom home loans come in various forms and have different eligibility standards. When you’re trying to finance your custom home, it’s essential to be aware of these different loan types to make the best decision for yourself. Although considering this information may involve some research and legwork, it is always worth it in the long run. That is why our team at Built Right Homes recommends going through our experienced lenders when inquiring about custom home loans. They will assist you every step as you work towards building your very own custom home! Contact Built Right Homes today for more information, and get ready to start the journey toward pursuing your perfect dream home!
