Building a home is a dream for many Americans, but navigating the world of new home mortgages can be a daunting task. Finding mortgage lenders that will work with your situation is the key to successful financing.
Initial Plans for a New Home
There are many things to consider when building a new home, and most of the decisions will affect your financing. Your first step should be finding out how much of a home you can afford. Remember to factor in the price of land as well.
Although you probably do not want to accept any new home mortgage offers at this point, you should discuss with a lender how much of a loan you qualify for. Make sure this fits into your budget by working out monthly payments calculations.
Once you have a good idea of where your finances are, you can determine what kind of a house you will build. Based on your loan potential, you should be able to answer the following questions:
- Where will the home be located? Prices may vary dramatically based on where you want to build. A new home in a heavily wooded area will cost more than a home in a planned community because the builder will need to clear the land and run new utilities to the area.
- Who is your builder? Many home builders will need to know your finances so they can work within your budget. They should have several home plans you can choose from and will often show you ways to keep costs down.
- When will you build? This is especially important if you need to sell your current home or if you will be buying the land several months in advance. Either scenario may mean more out-of-pocket expenses if you are still paying your current mortgage while concurrently making payments on your new construction. You should also allow for additional time based on delays in construction.
- What are your home plans? Most builders have pre-designed plans you can choose from or you may go with an architect who will develop blueprints based on your ideas and needs. Whichever you chose, do not let anyone pressure you into adding features you are not interested in.
Financing a New Home
Depending on when your home is built, there are two main financial options to explore.
Before a builder will start construction on your home, you will need to have a construction loan in place to finance the project. A construction loan is usually a short-term loan that converts into a conventional mortgage at the completion of the project.
During the building process, you will make monthly payments to your lender while the lender makes payments to the builder at difference stages of construction. Once the house is finished, the builder receives the final payment for the home construction.
Typically, construction loans convert into new home mortgages after the home is built. Although the interest rate on the construction loan may be higher, since it is a short-term loan, you can make up for it with a lower mortgage interest rate. You will also save hundreds of dollars on closing costs by using the same company for both loans.
If you need to make payments on your new home mortgage before you sell your current house, you may need a bridge, or swing, loan. This type of loan allows you to use the home you are currently paying a mortgage on as collateral until you sell it. Since most homebuyers do not have enough cash to buy a new house while their assets are still in the old one, this can be a great tool for getting you through the in-between period.
As with any type of loan, fees and interest rates for bride loans vary. You may be able to negotiate a better deal if you get a bridge loan from the same lender who provides your new home mortgage. Many home mortgage lenders, like Wells Fargo and GMAC, offer all the home mortgage products you need.
New Home Mortgages Summary
Planning your finances carefully and working closely with your lender is one of the most important things you can do to make getting a new home mortgage a painless venture. Since you may be using the same financial institution for several loans related to your new home, make sure it is a company you feel comfortable with and that treats you fairly.