If you’re finding that buying a ready-made home just isn’t working, you’re not alone. Maybe you’re tired of searching through disappointing listings, or you can’t seem to find exactly what you want in your desired area, or it’s always been your dream to completely customize a home from scratch.
Whatever the reason, there are many different motives for building a home from the ground up. However, whatever your reasoning, you’ll most likely need to take out a construction mortgage to do it.
To learn more about construction mortgages and how they can help you build your dream, custom home, read our guide below.
What is a Construction Mortgage?
A construction mortgage is just like any other mortgage — it’s a loan you receive to help you finance a home, except a construction mortgage is for a home that doesn’t exist yet.
Often released based on stages of completion, a construction mortgage will help you receive funds in bulk while you complete the construction of your custom-built home. However, because your house is yet to be built, there is a significantly higher amount of financial risk for a lender.
To supplement the high risk for lenders, they will often ask you for a higher down payment than a traditional mortgage, generally around 25-30%.
Why Do I Need a Construction Mortgage?
Building a new house from scratch can be expensive, laborious, and time-consuming. Receiving financial aid can help you expedite the process and get you into your home sooner, rather than paying for everything yourself over a longer period of time.
However, construction mortgages are structured uniquely. Money is often released to you after completing predetermined construction stages, allowing you to begin the next phase only after the previous has been completed and appraised.
From excavating, to roofing, to plumbing and wiring, and then finishing, there are different stages and mortgage amounts you can be lent along every step of the way to building your home. This financial help will allow you to get through the bulk of each construction phase quickly and efficiently.
How Do I Get a Construction Mortgage?
Like any mortgage loan, you can get a construction mortgage from a variety of different sources. Banking institutions are among the most common, but private mortgage companies or brokers can also offer construction mortgage plans.
Just like a traditional mortgage, you will need to provide information on your income, assets, debt, and credit history to apply for a construction mortgage. You will also need to provide specific details about your contractor and construction outline, even if you plan on building your home personally.
Suppose you plan on hiring a construction company or contractor. In that case, you will also generally need to produce a signed agreement with them detailing the contract amount and estimated timeline for the project for your loan to be approved.
What to Look for in Construction Mortgages
Not all construction mortgages are the same. Depending on who you receive yours from, you’ll want to firm up a few conditions.
First, ensure that your monthly mortgage payments will fit within your current budget and projected income over the duration of construction. It’s also beneficial for you to establish whether your mortgage rate options can be adjusted rather than fixed over the entire project.
Additionally, try to find a mortgage plan with flexible down payment options in case of any unforeseen future financial obstacles during the construction phases. For that same reason, a plan with a locked interest rate from your construction’s start date is also highly desirable.
Lastly, look out for any construction mortgage plans that avoid recurring inspection costs. Some mortgage plans will include details requiring you to pay fees for progress and appraisal reports during your construction.
Thinking about building your custom dream home from scratch? We’re experts at helping clients make their real estate dreams come true. Contact us here to find out how we can help you get started on building your dream home today.
