When considering a custom-built home, you likely have a lot on your mind, including layout, location, and deciding on all the small details that will go into it. With everything else on your plate, securing the best possible financing for your home is likely not the most exciting thing on your ever-growing to-do list. However, it is critical that you get the financing you need to make your house project a success.

Financing for custom-built homes can differ slightly from traditional mortgages, so it’s best to familiarize yourself with the process before beginning the build. If you’re considering financing a custom-built home, read on to learn more about finance and home building!

Get Prequalified for Your Mortgage

Before you can secure financing for your custom home, you must first get prequalified for a mortgage. During this process, you’ll connect with a potential lender to review your financials, including your credit history, debt-to-income ratio, and the overall financial obligations associated with building your home. You’ll also need to provide specific documentation during prequalification. Make sure you have as much information gathered as possible when you begin the process, including:

 

  • Proof of Identity
  • Bank Statements
  • Pay Stubs
  • Recap of Debts and Assets
  • Tax Returns
  • Current Housing Cost Statements
  • Other Debts and Liabilities

 

Get a Project Estimate

This is the point you meet with your builder to get a better understanding of your project’s budget. Your financial institution will want to know what you hope to procure when you request financing and expect to see as much information as possible; partnering with a seasoned home builder will help you submit an accurate project estimate.

Determine Which Loan Is Right for You

As mentioned previously, financing a custom-built home will be slightly different from a traditional mortgage. That means there are several different types of loans to be aware of and consider.

 

  • Construction: This loan is an excellent option for covering the cost of materials and the actual building of your lot. These loans require a well-presented project plan and usually run on a concise timeline since the loan is just for the construction process. Be prepared to put as much as 20% down, as there is more risk involved for the financial institution in the build process.
  • Construction-To-Permanent: These loans operate like the aforementioned construction loan, but they allow the borrower to convert into a mortgage after construction is complete. This loan is a great option for many individuals looking to build a custom home, as both the cost of building and the mortgage can be tackled in one swoop.
  • Lot: These loans are best for those looking to finance the purchase of land. We generally recommend lot loans for those needing more time to dive into the build process. If details like your timeline, your search for a home builder, or the finalization of your construction plan get in the way of an immediate build, a lot loan might be for you. However, a construction-to-permanent might be best if you are prepared to begin the build process.

 

Expect It To Change

When you choose to custom-build a home, you should be prepared for the possibility of small changes and project extensions along the way.  For instance, you might decide to modify your design mid-construction or add an extra feature, like outdoor living.  If these changes require refinancing your loan, you could face significant delays, sometimes lasting over a month.

The way changes are handled during construction largely depends on the type of contract you have:

  • Fixed-Price Contracts: With this type of contract, the total cost is set based on an agreed-upon final price, with a few allowances for specific items. For example, you might receive a budget for certain materials or fixtures, but the cost will increase if you exceed that budget. Any changes to the scope of work after the contract is signed are typically handled through a change order. A change order is a change made after the contract that outlines the modifications and any additional costs associated with them. Change orders are also typically paid for during construction directly by the homeowner instead of going through financing.
  • Cost-Plus Contracts: In this type of contract, the homeowner approves bids for various items before they are installed. All invoices are presented to the homeowner, who pays the actual costs plus an agreed-upon fee or percentage to the builder.

Adjustments to the loan amount during construction are not common when using a construction loan. However, a reputable financial institution will be able to work with you on potential changes to your construction loan if necessary. However, it’s best to avoid major changes whenever possible, as these could affect your interest rate and will impact your overall project timeline.

Make Sure You Choose a Quality Home Builder

A quality home builder can make or break your building process. An experienced home builder will be well aware of this process and likely will have relationships with financial institutions. When you have the right builder in your corner, they can help you through this process, and much of the legwork will fall on them. The right home builder will simplify this process for you and be a considerable asset when submitting plans for approval and providing your financial institution updates on construction.

If you need a quality custom home builder in North Texas, call Maykus Homes today! We’ve been building amazing homes across DFW for decades and are here to make your dream home a reality! Call now to discuss your project!