Home Building Financing

For many new and seasoned builders, home building financing can be a headache. Signing bank loans and down payments, paying various contractors, and purchasing endless materials create a unique financial situation that is often frustrating and difficult to manage. But securing the money to build a house does not have to be complicated. Banks and lenders now offer many different programs and options to meet the distinctive needs of a residential builder. By knowing the available choices, individuals who wish to build their own house or one to rent or resell can be prepared for the process ahead.

Unlike other financial investments, home building financing is divided into two parts: a construction line and a residential mortgage. The construction line loan covers materials to actually build the home. This agreement includes contractors, suppliers and materials during the construction period of the project. Proof of expense must be verified before the lender will release funds. Interest rates are higher than residential mortgage loans and repayment is due 30 to 60 days within completion of the house. Construction lines usually are tied to a fixed draw schedule a certain amount of cash allowed for each phase of the project. Lenders will charge extra fees if the builder overspends the amount, so builders must budget appropriately. Build in a cushion for each phase in case expenses are greater than anticipated.

The second part of home building financing, residential mortgages, usually pay off the construction line once the house is completed. Most often, these loans must be determined at the same time as the construction line and come with the same options as any other home mortgage: conventional or non-conventional loans or fixed rates versus adjustable rates. Interest rates are lower and like other mortgages, repayment is spread out over a longer period of time such as 20 or 30 years. Builders have the option to use the same company for both loans or they can choose to use different lenders. However, although this was the preferred method through the 1980s, using separate companies or even separate loans within the same institution has its drawbacks. Builders have to pay double the closing costs, provide more money up front and often have to start making payments during the construction of the home.

Some financial institutions have begun to change and now offer combined home building financing options to attract builders with special incentives. One popular offer, the construction to permanent loan, combines both the construction line and the residential mortgage line into one easy loan package. The loan still incorporates the two phases, but only one closing is required. And the only interest payments are required during the construction phase of the project. The builder saves in time, attorney fees and taxes. However, interest rates for these types of loans tend to be higher.

Other lendors offer an owner-builder program, where the owner actually takes over the roles of contractor. In the past, this option has mainly been used by people who had lower credit scores, But today, even middle-income people building their own houses find this option appealing. Individuals looking for home building financing options have more control and do much of the work themselves, saving thousands of dollars. Lenders become more than just a banker. They often provide advice in contracting, building and setting up a mortgage plan. Plus, these loans will cover almost all costs involved from purchasing land and materials to closing costs and fees. Most financial institutions that offer this plan wont require a down payment either, unlike others who may require 5% to 20% of the loan value.

A few companies even provide green mortgages, which offer rebates and extra incentives for builders who maximize energy-efficiency by placing in solar panels or eliminating carbon footprints. However, the cost of these added features are usually more costly than current building methods and have to meet fairly stringent guidelines. Future energy savings may justify the expense. The individual builder must decide and weigh the options. With all the various packages offered today, it is always important to shop around for the best deal.

With any type of financing, builders must plan efficiently. Start with a sufficient start-up budget for any home building financing project. Costs can range anywhere from $5,000 to $10,000 depending on the scope of the project. Down payments must also be taken into consideration. Lenders usually require a minimum of 20% as a security on a loan. This can include cash, equities, or other project. The good news is that often the start-up budget is considered part of the down payment. Cushion the rest of the construction line for extra or increased expenses. And as in all loan applications, proper documentation of employment, credit history, and current financial assets must be provided. But with home building financing, builders must also include construction specifications of their house, cost break down and the purchase contract or title of the land where the construction will take place.

Building a house is not easy, but it is worth the cost to have a place to call home. Behold, now the day draweth toward evening, I pray you tarry all night: behold, the day groweth to an end, lodge here, that thine heart may be merry; and to morrow get you early on your way, that thou mayest go home (Judges 19:9). When the contractors are finished and the supplies all used, the builder has a house he can be proud of for years to come. And if he selected the right home building financing option for him, then the payments wont be a burden financially.

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