The process of building a custom home can be quite different from buying one that’s already built. You probably understand this to some extent. After all, you’re building a completely brand new structure—this alone creates different circumstances from moving into an existing home.
However, you might not know that securing financing for a custom home can also be quite different. If you’re expecting the process to progress as it would if you were buying an existing home, you’re likely to be disappointed.
To help you better navigate the process of securing custom home financing, the team at Maykus Homes has some tips and advice. We recommend asking these questions of your lender when you begin the process for the best results.
1. What’s the Loan Type & Structure?
Financing a custom home is typically structured quite differently. Since new construction is subject to a great variety of external pressures, lenders structure their loans accordingly. Your lender probably offers a variety of loan structures if they’re familiar with custom home financing, so be sure to ask them what options are available.
Construction-to-permanent loans, one-time construction loans, land loans, and renovation loans are all options to consider, but the differences among them matter significantly. For instance, construction loans do not convert into traditional mortgages at the end of the build process, as a construction-to-permanent loan does. Be sure to discuss your options thoroughly before committing to any loan type.
2. What’s the Minimum Down Payment?
It’s not uncommon for lenders to want to see a higher down payment when financing a custom-built home. Remember, they’re taking a risk with this loan, and many compensate for this risk with higher minimum down payments.
The usual 10-20% down payment might not suffice, and you should note this when investigating. We’ve seen as much as a 20-30% down payment for new construction, but this can vary from lender to lender and from borrower to borrower.
3. What’s Your Process on Builder Approval?
Any financial institution that lends you money to build a custom home will be very interested in your custom home builder. A qualified and experienced custom home builder will help assuage their concerns and let the lender know that your custom home project will run smoothly.
Consequently, many financial institutions have preferred builders or may even only lend to homeowners who agree to work with a pre-vetted list of custom home builders. It’s important to deduce your lender’s policy ASAP. Alternatively, if you choose a custom home builder in advance, they can be a resource. Many custom home builders have connections with local financial institutions that they can recommend to their clients, which can be a great way to navigate the process.
4. What Happens in the Event of a Delay?
Life happens. Even the best-planned construction home projects might experience minor delays from time to time. Because small delays are always a risk, be sure to ask your lender about their policy on delays. Construction delays could increase your fees, extend your interest-only period, and lengthen the time you need to cover additional costs, such as an existing mortgage or rent, before you take possession of the property. Discuss this policy with your lender so that you’re not surprised later on.
5. Is the Interest Rate Fixed?
Interest rates can fluctuate with market conditions during the construction period for a custom home loan. This usually means that you’re only paying interest during the building process. There are, of course, ways around this, like securing a construction-to-permanent option with a fixed rate, but it is worth discussing as soon as possible.
Partner With a Qualified Custom Home Builder
Securing custom home financing is a great step, but it’s not the final step. Partnering with an experienced and qualified custom home builder is far and away the best way to safeguard your project. A good custom home builder will know what they need to do to keep your project on track, which significantly reduces the odds of going over budget. This results in a much cleaner, more efficient financing process and lets you focus on getting into your dream home.
Are you ready to build your dream home? Call Maykus Homes today!