Mahi Sall, Advisor, Fintech-Bank Partnerships, Payments and Financial Inclusivity
January 25th, 2023
Mahi Sall is the CEO & Founder of FinXpair, a Berlin-based strategic advisory boutique firm focu[...]
Financing Basics for a New Home Build
Guest Post | May 25, 2021
Building a home can be exciting, and it can also be daunting. There are so many factors to consider, from construction information to financial facets. Almost everyone starts from scratch with a very minimal sense of how to actually build a home.
Something important to keep in mind is that building a home has different financing options than purchasing an existing home. You must be sure to understand as much as possible about the details so that things will go as smoothly as possible.
Understanding New Construction Mortgage
Traditional resale home mortgages do not apply to new home construction projects, as lenders often hesitate to approve a loan for something that does not exist yet. Because the project is only in the planning stage when you seek the loan, the costs are projections and assumptions rather than concrete facts. Lenders in this situation do not have an actual assurance, so they do not feel secure in lending.
Those building a house will generally opt for construction loans, which are designed to cover building costs. There are different types of construction loans, such as construction-to-permanent, construction-only, owner-builder, and renovation loans. These kinds of loans vary in costs and applicability. Choose the loan that suits your needs best and that you are comfortable with financially.
You can also get two construction loans if one does not cover the total cost and you're not able to pay the remainder. Once the home is built, your construction loan can be refinanced into a traditional loan. Some construction loans are also converted to permanent mortgages once the house is completed.
Considerable Upfront Cost and Legwork
Once you have decided to build a house, set a realistic budget for it. For contingencies and cost overruns, adjust it by 10%. You can find builders and ask for their quotes to help you craft your budget by beginning to determine how much the construction will cost. After setting a budget, you can apply for a construction loan.
Construction loans come with considerable down payments, which range from 20-25%. While some lenders do allow a down payment lower than 20%, you will need to pay for private mortgage insurance in addition in order to secure one of these loans.
See: Fintech Canada Directory Category: Real Estate
Additional fees you have to prepare for include closing costs. These can include the lender's fee, other mortgage-related fees, and miscellaneous fees. You will also need to pay for the final inspection survey and final inspection fees once the property is done.
In addition to preparing your finances to apply for the loan, you will also need to prove to the lender that your project is confirmed and will come to fruition. One key point they'll check is whether you have a reliable builder selected.
There can be a lot of work and money associated with getting a construction loan approved. The lender is not only approving you; they're approving the builder as well. Be sure to find a trustworthy contractor and builder with an impeccable reputation for not going over-budget.
Do some research to find the builder that will give you a better chance of getting approved for a construction loan.
Builder Financing
Some builders have their own mortgage subsidiary for building new homes. This can be a convenient one-stop-shop option to do all your financing in one place. You also won't have to jump through as many hoops with a bank or credit union to get a builder approved.
However, this can be the more expensive option. Your builders will be taking care of the mortgage and all the paperwork it requires; therefore, you are technically paying for the convenience as well. If you are on a tight budget, be sure to shop around and compare new home build financing options.
Weigh Your Options
Building a new home can be a wonderful, exciting experience as you create exactly what you want in a house. It can also be more expensive and come with a lot of surprise expenses as construction progresses.
Consider if other loan options are suitable for you in a resale home market, such as a Federal Housing Administration (FHA loan). You can use a free FHA mortgage calculator to get a sense of the factors you should consider, as well as the projected payable value you can expect when securing financing.
Remember, the lender may allow you to transfer the construction loan to a more traditional type of loan. So, familiarize yourself with other loan options as well, even if you know you will be starting with a construction loan.
Before deciding, weigh all the options available. Compare loan types and consider other financing options you can avail yourself of in the future.
Ready to Start Building Your New Home?
Building a home is a huge life decision, and securing funds for constructing a house can be challenging. Planning, funding, and building your own home is a significant undertaking that involves more thought, legwork, commitment, and cost than purchasing a pre-built home. The benefit, though, is that building your own home makes it more satisfying and more personalized. Do your research, consider your options, and build your dream home!
The National Crowdfunding & Fintech Association (NCFA Canada) is a financial innovation ecosystem that provides education, market intelligence, industry stewardship, networking and funding opportunities and services to thousands of community members and works closely with industry, government, partners and affiliates to create a vibrant and innovative fintech and funding industry in Canada. Decentralized and distributed, NCFA is engaged with global stakeholders and helps incubate projects and investment in fintech, alternative finance, crowdfunding, peer-to-peer finance, payments, digital assets and tokens, blockchain, cryptocurrency, regtech, and insurtech sectors. Join Canada's Fintech & Funding Community today FREE! Or become a contributing member and get perks. For more information, please visit: www.ncfacanada.org
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