Thinking about building a new construction house? But not sure how the money works? And don’t want to put yourself into financial ruin? New Construction is THE MOST dangerous & volatile thing I deal with as a realtor.
Have you ever read a book and when you see the movie it’s never as good? That’s what New construction is like. Reality can never achieve what your mind can conceive. So from the start let me say - Custom Home Building… DON’T DO IT. . . For those of you still here … Let’s dive into how the money works with financing a new construction!
If we haven’t met before, My name is Lucy Hood and I’m a top producing Realtor that has bought, sold, built and managed a great number of properties. It’s my mission to bring you wealth and understanding through real estate, right here in the smokies.
STEP 1 -
The biggest questions you need to ask with Custom Built- how many square feet are you building? And what is your builder’s estimated cost per square foot? If you google this, it’s WAY wrong. So before you watch this video, check out my previous video on how to choose & vet the right builder. You want to have the builder you’re going to use selected before you look at lots or see about financing.
Disclaimer: I AM NOT A LENDER, but Just for your rough calculations, you want to have a 20% - 30% down payment put aside for the lot and construction together. Technically the minimum credit score is 620, but at that credit score - your terms are going to be terrible. Truly, It’s best if you have a credit score of 740 or better for a Custom Built.
HOW DOES FINANCING CUSTOM BUILT WORK?
So about your 20%-30% down payment. You can use the land you purchase as part of your down payment. Let’s say you bought land with Cash for $50,0000 and you want to build a $300,000 house on the lot. 20% of $300k equals $60,0000 down payment. So you can use the $50,000 lot as down payment or collateral, and only have to provide an additional $10,000 to get financing. Now if you financed the lot, it works a little differently, but essentially you can use the equity as down payment.
So once you’ve got your builder selected, lot purchased, and you’re ready to start construction - there are two ways to go about financing. You can do a 1 time close after it’s completed construction, or you can refinance after it’s completed. Both of these loans are going to cost big dollars in financing charges & they come out to roughly the same cost to you the buyer. Its just about which works best for your situation.
- 1 time close is best for locking in your rate. If you think that rates will continue to rise (which I think they will until at least 2025) OR If you are concerned about your monthly payments changing, 1 time close is a good option for you. It locks in your rate from the get go & you just have one easy closing after the home is completed.
- Refinance after completion - If rates are most likely going to get better by the time the house is completed or your estimated loan disclosure you got from your bank or lender has really aggressive terms… Refinancing after completion is best for you. Basically you can work it so you make interest only payments during construction, and refinance after it’s completed. So you’ll have a closing on the loan, pay interest while building, and then have another closing once everything is all done.
Now these New construction loans will not do a few things. ..
- They will not allow you to build something “unconventional”. Meaning a tiny home, a cabin kit, shipping container home, or a fancy yurt. The only type of financing you’ll be able to use in these situations is Cash or a Hard Money loan. I do NOT recommend doing a hard money loan, unless you’ve hit the jackpot on a property.
- They also require the builder to jump through alot of hoops to get every draw. So if you have a less tech savvy more hands on builder, or are planning to build yourself - you’ll want to let your lender know.
I have an AWESOME list of lenders that will have an honest conversation with you about all of these things in detail & tell you whats best for you - without having to pull credit or submit documents. So if you’re feeling overwhelmed - just text me with the words “New Construction Lender” & I’ll send you my top notch money magicians.
Now that you’ve got your money worked out, lets make sure you KEEP IT & get the house of your dreams. Check out next week’s video which is all about WHAT TO INCLUDE IN your contract, so you don’t get swindled or put out on the street.
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865-264-0517