For many people, building a custom home is a dream come true, but the complex financing, design and construction processes can be intimidating. However, a few steps can be taken to help you prepare for this incredible undertaking.
First, engage the right professionals. Working with experienced builders, architects and bankers will help ensure your process goes smoothly. While you work with the architect and builder on key decisions for the home, you should also focus on securing financing with your banker. The builder will not be able to start building the house until the financing is complete, so this is an important step to secure early in the process.
With respect to the financing, your banker will assist in helping you qualify and understanding all aspects of the process. Unlike production homes, whose builders essentially finance the construction, custom construction relies on financing provided by the buyer.
Financing the construction of a new home can include the purchase of the lot (if it is not already owned by the buyer), financing for the construction stage of the project and the permanent mortgage. Traditionally, financing was separated into three stages: the lot, construction and permanent mortgage.
Each stage had its own approval process, rate lock and closing costs. Fortunately, one-time close construction financing is available with select institutions. One-time close financing provides the financing for the lot, construction and permanent mortgage into one loan (and one set of closing costs) and, in most cases, with one qualification process. A one-time close mortgage can also provide a locked rate at the start of construction instead of after the home is complete.
There are three primary stages to the approval of the one-time close construction loan. Each stage is required prior to the beginning of the construction of the new home.
- Credit application: The credit application is similar to a traditional mortgage option. The lender reviews the buyer’s mortgage application, credit report, income and assets.
- Project review: The project review also resembles a traditional mortgage appraisal, except the home only exists in the plans. The plans, specifications, budget and signed construction contract are required prior to the appraisal request. Once a complete package is received, the lender will request the appraisal from an independent appraiser. The down payment will be based on the lower of the appraised value or total project costs. If the future homeowner already owns the lot, the equity can go towards the down payment.
- Builder review: The builder review includes a review of information provided by the builder, such as credit report, articles of formation, financial statements, bank references, proof of liability insurance, etc. The lender’s approval does not relieve the buyer from responsibility in carefully selecting a builder, nor does the lender’s approval create any obligation on the lender if the builder fails to complete the home per the terms of the construction contract.
Payments during the course of construction are interest only on the outstanding balance when the monthly payment is due (the payments start small and increase as construction progresses). Once the construction is complete, the payments change to a standard mortgage payment with interest and principal (and property taxes and homeowners insurance if applicable).
While building a home can be stressful and complex, careful preparation, organization and open communication with your banker will help ensure the process goes smoothly from start to finish.
Mark Drew is a Vice President, Residential Lending Production Manager for Amegy Private Banking Mortgage in San Antonio. He partners with other professionals as the mortgage specialist on Amegy’s Healthcare Services Banking team, collaborating to provide physicians with personalized solutions and comprehensive service.
The healthcare team specializes in meeting and anticipating the needs of doctors, corporate executives, professionals, entrepreneurs, business owners, wealthy individuals and families who expect and deserve excellence and seek personalized relationship banking. For more information, please contact Drew at 210-378-3665, email firstname.lastname@example.org or visit amegyhealthcare.com.