With the current economy trend setting low real-estate prices, many assume that buying a used home is worth every dollar they fork out. Others engage in apartment loans, thinking of it as hitting two birds in one stone: having your own home while gaining some extra cash through rental income. While these are all very good strategies, some families opt to get a construction loan and build the home of their dreams.
Although it might sound difficult, building your dream home is possible, provided you understand how a construction loan works. Presently, the construction-to-permanent loan remains the most popular option. This loan encompasses full lot and construction coverage, and even converts to a mortgage the moment your dream house has been established. Once you’ve laid down the down payment, all you have to do is make interest-only payments at a fixed interest rate. And after the construction has finished, the loan will be transformed into either a 15-year or 30-year fixed rate mortgage.
Certain banks will dish out interest reserve accounts that allow you to make interest-free payments throughout the construction process. The bank will calculate the amount of interest-only payments and add the total amount to the overall loan. Funds will be deposited into a different account, which makes this ideal if you currently have pre-existing mortgage or rent payments on your plate. The licensed contractor you’ve hired will then mete out a ‘release schedule’ that details the monthly construction schedule with the necessary funding in tow.
Once you have determined that one of these new home construction loans suits your tastes, then there are five quick steps to set you off on the right track:
1. Know your Affordability Limits
You need to determine how much of the total loan you can afford by using an online loan calculator. Remember that you need at least 20% of down payment to avoid PMI payments.
2. Find Lenders
Compare the current loan rates from online lenders and local banks. Ask a reputable building contractor for past lenders they’ve worked with, and attain their contact information.
3. Attain Pre-Approval
Skim through the pre-approval process of each selected bank. Outline the closing costs and estimated tax rates. Ask for a copy of a pre-approval letter.
4. Find a Contractor
Settle on a reputable contractor that is licensed, insured and has experience in constructing new houses. Figure out a budget plan, building cost and architectural schematics to get your house project underway.
5. Select the Land Piece
Hire a reputable realtor to identify a suitable piece of land in line with your budget. Verify any attainable building permits from your local municipality, and make sure a septic and water system is readily available.