4 Types of Financing for Building a Home in Mississippi
Building is your chance to have everything you want in a home, but the getting financing for building a home is a different process than a typical home loan. For many, buying a home requires a mortgage. When it comes to building a home, it requires a mortgage – with a twist. Home construction loans can be complex, but we’ve outlined the nuts and bolts in this article.
Getting Financing For Building a Home
Financing for building a home is much different than the traditional mortgage process. The major difference in getting financing for building a home vs a traditional mortgage is that you have to pay the builders for the construction of the home as well as the actual home itself. Even with that being said, building a house is the best option for home buyers who know exactly what they want.
With a construction loan, the lender pays the contractor – not the borrower. Construction loans are typically shorter term loans that cover the cost of building your home. Once building is complete, home construction loans are either converted to permanent mortgages or paid in full.
Construction-to-permanent loans are the first type of construction loan we’ll discuss. The construction-to-permanent loan is often referred to as a single close loan. You borrow to pay for construction. When you move in, the lender converts the loan balance into a permanent mortgage. It’s two loans in one. You close the loan only once with a single close loan (hence the name), which reduces the fees you pay.
With a single close loan, borrowers typically put down 20% – 30% of the cost of the home. This is pretty much the same as with a conventional mortgage for buying a home. During the construction phase of a single-close loan, you only pay interest on the outstanding balance. The interest rate is variable during construction, moving up and down with the prime rate. Once the construction of the home is completed, the loan is converted to a traditional mortgage.
Once you convert your construction loan into a conventional mortgage, it works just like any other mortgage. You can choose a fixed-rate or an adjustable-rate loan, and specify the loan’s term. Typically mortgage terms are for 15 years or 30 years. These terms are based on what you and your lender agree on. When you’re ready, we advise that you comparison shop different mortgages and lenders to see what works best for you.
This type of financing for building a home works best if you have a straightforward construction plan and want predictable interest rates. With that being said, construction delays due to weather and other unplanned mishaps are fairly common.
Stand-alone Construction Loan
The second type of loan is stand-alone construction. It’s a referred to as a double close loan because you pay for two closings and two sets of fees. Your first loan pays for construction. When it’s time to move in, you get a mortgage for your new home. It’s two separate loans.
A double close loan can be worthwhile when it doesn’t require as much cash upfront. This can be a major advantage if you already own a home and you don’t want to spend as much for a down payment. With a double close loan, you can live in your current home while your new home is under construction. Once you sell your home, you can use the proceeds towards your new home.
The downside of this loan, however, is that you have two closings and two sets of fees. Once you’ve finished the construction of your new home, the stand alone construction loan must be paid in full before you’re able to get your second loan – a traditional home mortgage.
FHA Construction Loan
The Federal Housing Administration (FHA) has a program to assist people with both building and buying homes. The FHA doesn’t lend money itself, but it guarantees mortgage loans made by private lenders to qualified borrowers looking to get financing for building a home. While very rare, FHA construction loans do exist, it’s just that most lenders hate to do them. An FHA construction loan has the same advantages, and eligibility rules, as other types of FHA loans.
FHA construction loans are usually construction-to-permanent (single close) loans. Once approved, funds for the construction are placed in an escrow account and the builder will be put on a bank-draft schedule that follows the project’s construction stages. As funds are requested, the lender will usually send someone to check on the job’s progress. Once construction is completed, the FHA normally requires a final inspection or certificate of occupancy from the relevant local authority.
There are several key differences in these loans compared to others. The borrower must purchase the land at the closing of the loan or have owned the land for six months or less at the time of the application of the loan. While harder to find, and typically more strict, FHA construction loans can be extremely attractive.
FHA construction loans typically allow as little as 3.5% down. As with other single-close loans, you’re only expected to pay interest on the loan until your home is completed. Make sure that you keep an eye on interest rates. An FHA loan could mean a higher interest rate or additional monthly fees that don’t normally come with traditional financing.
In many aspects, cash is king. When it comes to building a home, the saying definitely holds true. If you can afford to pay cash for your home, it has many advantages – especially in today’s market.
For one, when you pay cash for a new home, you can skip a lot of the waiting that comes with getting a loan. The approval process for a loan can take up to 12 weeks. Without all of that paperwork, you’re saving time and trees.
Cash buyers pay a lot less for their home in the long run. One of the largest costs that come with a home mortgage is paying the bank. Cash buyers save money on closing costs, bank appraisals, mortgage applications and fees, title insurance, and interest. Mortgage interest on a 30-year loan can double or triple the original purchase price.
Finally, the peace of mind that comes with skipping house payments is priceless. Once your home is built, you immediately gain full equity in your home. We’ll keep our fingers crossed and hope for appreciation!
Considering Getting Financing for Building A Home?
Remember, building a home takes a long time and the process has lot of moving parts, so you must select your financing with care. Construction loans are dramatically outweighed by traditional home loans, so look for an experienced construction lender who can lead you through the process. Here along the gulf coast, regional banks and credit unions are typically the best sources.
Typically, your lender will look into the builder’s credit standing, financial situation and licenses, as well as the track record for building similar homes before you get a mortgage.
Regardless of house you get home financing, it’s important to do your homework on the home builder. Find one that has built the kind of house you want in terms of price, style and size. Look into the builder’s credentials with the local homebuilders association and ask for references from previous clients.Your builder may also be a valuable resource when it comes to getting financed – especially home builders with larger operations.
RealGulfCoast writes articles that are intended to assist you. The content is broad in scope and does not consider your personal financial situation. Contact us to speak with our home services team and we can connect you with the appropriate professionals for your needs.