How to Finance a Home on Existing Property
Financing a new home on property you already own requires that you apply for a construction loan. These specialized loans are not often offered to individuals, so you may need to work harder to acquire one. It also requires greater planning, budgeting and oversight during the process than simply purchasing an already built home. Many lenders don't offer construction loans at all, and it's difficult to get a broad base of rate offers from multiple lenders as a consequence.
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Instructions
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Develop a home building plan and budget with a building contractor. You will need to account for potential budget over-runs in your application to the bank. In this way, the construction loan application process has similarities to applying for a business loan. Lenders will expect you to offer up your land as security for the loan, just like for a regular mortgage. It may improve your chances of getting approval if your building contractor can prove that they have enacted successful construction projects in the area on similar properties.
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Apply for the construction loan with the data you've gathered. Construction loans are rarely advertised by lenders, so you will usually have to contact the companies directly for more information. Schedule a meeting with a loan officer. Bring all the documentation related to your construction project you have drafted. Keep it neat and organized so you can make a concise, convincing presentation.
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Consider applying for a permanent-to-construction loan. Construction loans are very short-term loans that have a maturity date ending when the construction is estimated to complete. As such, they're designed for construction companies that will sell the property to qualified buyers. A permanent-to-construction loan will allow you to roll over the balance of the construction loan to a standard mortgage, which will make it more affordable for most builder-owners.
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Monitor the construction carefully to ensure that you comply with the terms of your loan once you are approved. If you go over your budget, the bank may decline to provide you with additional financing. If problems arise in construction that delay its completion, the bank may extend the period of the loan without charging penalties and raising the interest rate.
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Repay the construction loan once the home has been built either with cash or by rolling it over into a regular mortgage. If you're planning to convert the home into a rental property, you should qualify for a tax deduction for the expenses related to the construction under Section 179.
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