All the Ins and Outs of Custom Home Financing
Are you planning to build a new home? Have you dreamed of constructing a new home for your family? Then this is the right place to get all the financing-related info you need to kickstart your custom homeowner ambitions and build yourself a dream home.
Custom home financing is a lot more complicated than simply getting a home loan. While if you were just getting a loan to purchase a home that has already been built, you would not need anything other than the home loan itself.
But with loans for custom homes, you must go a few steps further. It all depends on your current financial position and how much of the real value of the property can you finance on your own. Let’s talk about this in a little more detail
What Are the Main Expenses in Custom Home Building?
When building a custom home, you will basically have to deal with 3 major expenses. These are –
- The cost of land purchase
- The cost of construction
- The cost of the mortgage
Naturally, all of these have their own separate criteria and you will need loans for all of these before you start building. Let’s go over the basics of getting a land purchase loan or a lot loan.
If you find yourself needing a loan for the land purchase, then several banking institutions will be offering lot loans. The prices and interest rates of these loans will depend upon where you are purchasing the lot, the total value of the lot and several other considerations.
As a general rule, the closer you plan to buy your lot to a city, the higher its cost is going to be. Ideally, you should look for a lot that is in close proximity to a city and may increase in value over the years. Here are some important factors to consider when looking for a good lot to build your custom home on:
- Proximity to an urban center (city, town etc.)
- Proximity to your workplace
- Proximity to schools, colleges etc. for your children
- Proximity to recreation zones
- Potential land value in coming years
- Local laws and policies governing land use
Now, when you decide upon a lot that suits your needs, you are going to have to purchase it before you can have permission to start building your custom home on it. For that, you are going to need a lot loan. Depending on where you live, there may be a lot of financial institutions that can offer you a lot loan. When you approach one, these are the things that are going to look at before your loan is sanctioned:
- How much down payment can you make?
- How much do you earn per year?
- What is the total sum of the loan?
- What is the duration of the loan?
- What is your financial history or creditworthiness?
- What significant events have impacted your financial stability (divorces, ill health etc.) in the past?
If you can satisfy your potential, then you might get sanctioned for a lot loan. Lot loans can have a rather short or a considerably long time frame. They can range from 2 to 20 years and can have fixed or floating interest rates. All of this depends upon your financial viability and the terms you can negotiate with your lender.
Now, while home loans are a really popular thing and most banks offer them at standard rates, custom home construction loans is more of a specialized field. For permanent loans based on mortgage, you can seek out a good mortgage company. But for a construction loan, you will need to go to a bank that deals in this particular area.
Keep in mind that just like the lot loan, you are going to need to put down more money to avail a construction loan. This can range from anywhere between 20 to 30 percent and will vary with each project. If you don’t know where to start with this, you can ask your builder for leads.
Most good and reputed builders will know the banks which deal with these kinds of loans and can even help you secure the loan if they are in good standing with the bank or lending institution. Once the lender starts entertaining your loan application, there are many things they will evaluate as they did in the lot loan phase. If you can meet their minimum criteria, then you might get approved for a construction loan.
A construction loan is usually a short-term loan and that is why it is financially intensive. To get approved for a 12-month construction loan, you will need to put down a sizeable amount of money and pay considerable interest. So, before you take up the construction loan, it would be wise to resolve any financial difficulties and clear the way for both availing the loan and repaying it.
Mortgage-based Permanent Loans
Mortgage-based permanent loans are great for those who want to buy a good house where they intend to stay for the majority of the remainder of their lives. A permanent loan can last up to 30 years, so making payments all throughout is both a serious consideration and a viable option.
For custom home building, this is a particularly good option because it allows you to build the ideal home where you would like to live for relatively lesser short-term liability, even if at the cost of a long-term commitment. So, don’t be afraid of committing to a long-term association if you are looking to build a custom home. It can be the best decision of your life and give your family a great future if you plan it right.
The best thing you can do to actualize your custom home dream is to take the loans you need from the same lender. This will streamline the loan acquisition and also help you mitigate the cost incurred with each loan considerably. Now, that you know the basics of custom home financing, it is time to get real. Seek out a good builder who can take you through the details relevant to making your dreams come true and embark upon a path that will see you financially stable and secure in years to come.
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