New Construction Loans 101
The number of homes built in the Omaha metro has skyrocketed to the highest it has been since 2009. In 2016 alone, there were 2,632 new homes built.
What really surprised us is that most people we’ve talked to don’t realize that you need a mortgage to build a home. That is, unless you’re planning on paying in cash.Did you know that most people need a mortgage to build a house? Click To Tweet
New construction loans begin very similarly to loans on existing homes. Once you know you’re serious about building a new home, you meet with a lender to get pre-approved. After being pre-approved, you start narrowing down what you want in your new home, like features and location. Then, instead of visiting particular homes, you visit communities and meet with builders.
After an ample amount of research, you will decide on one of two types of new construction loans. Depending on which you choose, the loan process begins to differ.
Construction Loan + Permanent Loan
Financing this type of new construction loan is only slightly different from obtaining a loan for an existing home. These loans are nicknamed a two-step loan because you literally take out two different loans.
The first loan you take out is the construction loan. These can be taken out by either the builder or the buyer. More often than not, we see construction loans taken out by the builder, especially when the home is part of a new development. This loan is strictly taken out to cover the cost of building the home.
You obtain your second loan, your permanent mortgage, after your home is complete. These loans work exactly like a loan on an existing home.
We always tell our clients that the only major difference between a mortgage on an existing home and a two-step loan is that you apply for the loan when the contract is signed with the builder, but the terms aren’t locked until the property is complete. In a mortgage for an existing home, the rates are generally locked when you apply for the loan.
So in the 6-9 months it typically takes to build a home, there’s time for your rates to increase or decrease, or for your financial situation to change.
A combination loan is also known as a one-step loan. It gets its name because you only need one loan for building your home and your mortgage. What happens is while your home is being built, you only pay interest on the home. After the property is completed, it converts to a traditional mortgage and you begin to pay down the principal balance along with the interest.
One-step loans are inherently riskier and, because of that, most lenders choose not to offer them.
We’d say that around 80-90% of buyers looking for new construction loans go with a two-step loan. It is advantageous in that the interest rate on your permanent mortgage is usually much lower than it would be on a combination loan.
If you are looking to build your next home, please reach out to us with any questions you may have. And remember, it’s never too early to get pre-approved for your next mortgage. We recommend getting pre-approved before you begin looking and it can be done as far as a year in advance.