Did you know that there are different ways to finance building the home of your dreams? – And they’re not all created equally…
When it comes to building a new home on land in the country, or anywhere that there is no production type builder developing the land, there are different ways to finance your project. But while they all help you accomplish your end goal, the costs of getting there can differ drastically.
We’ll walk through a typical scenario of buying land, building a home, and then obtaining permanent financing to give you the basics. At the end there will be a money saving bonus tip. So, make sure to read it all (Or if you want to save time like me, skip to the end).
Let’s say that you’ve found land that you’d like to build a house on some day. You intend to buy the land now but choose not to build your house until you’ve saved up a larger down payment – possibly a couple of years from now, but you’re not exactly sure. In this case, you’ll need to get a “Land Loan.” A land loan is just what it sounds like. A loan for unimproved land. What you might not know is that land loans are probably the least desirable type of a loan for banks. This means that to get the loan, you’ll need to pay the bank more to do it in the form of increased closing costs and a higher interest rate. You’ll also be required to put more money down. Maybe as much as 50%, but usually at least in the 25% – 30% range.
Now that you’ve got the land and it’s been a couple of years, you are finally ready to build the home of your dreams. This time you’ll need a different type of loan – a “Construction Loan” to build your house. Here again, a construction loan is just what it sounds like. It’s a loan that you get to complete a construction project. Construction loans come with their own set of closing costs and are interest only, albeit with a higher interest rate than a market 30-year fixed loan. They are usually for 1 year or less in length before you must pay it off. This type of loan starts with a $0 balance and then goes up through a system of payments to the builder called a “Draw Schedule.” A draw schedule is just a list of times that the builder can ask for payments that the bank and builder agree to before construction starts. For example, the builder might ask for an initial draw of 20% so that they can buy materials, another draw when the foundation is complete, another when the framing is done, and so on until the project is completed and the full amount of the loan is drawn from the bank. At each step of the way, the bank will send out an appraiser to verify that the work completed justifies the draw that the builder is requesting. You will also likely be asked to sign off that it’s ok to advance the money. Each time they do, your payment goes up.
At last, your house is complete on the land that you bought, and you are ready to get your final financing. The final financing is likely the same kind of financing that you could get for any house you would purchase. The new loan simply pays off the land loan and construction loan and rolls all of the outstanding balances into one mortgage. The good news here is that you now have a highly marketable loan on a beautiful piece of collateral and will likely qualify for normal market interest rate and one final set of closing costs.
Looking back, you’ve had 3 different sets of closing costs (Think thousands of $$ each time) and had a higher than market interest rate for the past year. I’m sure you’re starting to wonder “There has to be a better way!”
Good news! There is a better way. It’s called a “Three in One” or “Construction to Perm” loan. This type of loan is also just like it sounds. You get all 3 loans in 1 program. The program starts out like a construction loan where the first draw of the construction loan is to purchase the land. The subsequent draws progress just as if it were a normal construction loan and you pay interest only on the outstanding balance. Once construction is complete, the final balance of the construction loan becomes the initial balance for your permanent financing. The best part about this type of a program is that there is only 1 set of closing costs that occur in the beginning, saving you the fees on 2 additional loans.
So, what’s the catch? The only catch is that you must be organized and have all of your plans laid out, builder selected, and must be willing to complete the project in less than a year before you even buy the land. I know this sounds stressful – And it can be, at times. The good news, besides saving on closing costs and interest, is this is the most efficient and inexpensive way to build your house and you could save thousands of $$$ in the long run.
If you are even thinking about building or making a move, call the Ryan Reynolds Team today at (614) 726-6971. We can help!
…Helping YOU is What We’re Here To Do!