How to Finance to Build a House

There are a few ways to finance the new construction of a house. Many people use the equity in the home they own presently and then sell the home and pay off the equity loan once they move into their new home. However, if you don't already own a home, there are still ways to finance new construction. Most of these loans require a down payment and closing costs. But to boost their sales, many builders are paying the closing costs for customers. If you are planning on building a new home, shop around for the best offer from builders and mortgage companies.

Difficulty: Moderately Easy

Instructions

Finance to Build a House

1. Decide which plan for financing is best for you. Talk to a mortgage broker who handles new construction and go over the different programs she may have. Consider a home equity loan on a present house, if you own one, as the closing costs and paperwork may be considerably less.

2. Check with your builder to see if he has his own financing. Some builders have ongoing short-term financing that allows them to borrow the money while they are building as long as they have a purchase contract on the construction. This will allow you to finance the home as if it were an existing home, with the only difference being that the appraisal is normally done from a blueprint, and then a final inspection is arranged by the lender.

3. Fill out an application for a construction loan if you choose this option. The application will not be any different than a regular mortgage on an existing home. Ask the mortgage officer to set you up for a program that only requires you to pay closing costs once, as some of these types of loans will require two separate settlements--one when you close the loan and one when the house is finished and you finalize the loan.

4. Have the mortgage officer fully explain the loan to you. On most construction loans, you are only required to pay interest for six months, and then it converts to a conventional mortgage. This means you want to make absolutely sure your builder can complete your home in six months, and you want to understand the terms of the mortgage. You may not be able to lock in an interest rate at the time of construction, so you will want a cap on the maximum the loan rate may be.

5. Convert an adjustable-rate mortgage as soon as you can. Many construction mortgages are 1-, 3- or 5-year adjustable-rate mortgages. The idea behind this is getting the lowest rate possible while building and then having the rate go up as you make more money and become more stable. You may be required to keep this type of loan for a certain amount of time. Make certain you can refinance the loan after the first year so you are not subject to increasing interest rates.

Resources

• How Construction Loans Work

[pennynickols]

on 7/27/2009 Finance to Build a House is full of good ideas for a first-time home builder like me. Thanks.