One of the biggest and possibly most nerve-racking parts of purchasing a new construction home is getting the funds together. If you’ve purchased a home before, you know the lending portion of the process can be stressful, invasive, and time-consuming. However, when it comes to financing new construction, the process can be much smoother and even save you some cash.
In this article, we will cover the different types of loans available to the general public as well as those used specifically for construction projects. We’ll talk about how most large- and medium-sized builders have financing and closing systems in-house and are able to save you money if you choose to use their services.
Loan types
There are three basic marketplace loan programs available to consumers: FHA, VA, and conventional. The vast majority of borrowers will use one of these types of loans when purchasing a home.
FHA loans are federally backed loans for buyers with fewer funds available for the down payment (FHA loans require only 3.5% down payment) and who may have less than perfect credit.
VA loans are available only to veterans of the U.S. Armed Forces but allow for a 0% down payment.
Conventional loans are the third and most common type in the marketplace. These loans require a higher credit score than the FHA or VA and most require closer to a 10% down payment.
Construction specific loans
In the world of new construction, there are also construction-specific programs that some institutions offer. Most of the time you’ll find the programs at your small local banks or banks that work exclusively in new construction programs.
The first is called a construction-to-permanent loan. These are loans designed for those wishing to build a custom home on a developed lot while continuing to pay the mortgage on their current home.
The second type is called bridge loans. Some institutions offer these loans to qualified buyers to help them cover the cost of monthly mortgage payments on their current home while their new home is being built.
Our best advice is to call around and ask your local banks if they have such programs.
Builder financing options
Most new construction buyers in the marketplace today are going to purchase a home directly from a builder’s floorplan portfolio in the neighborhood of their choosing. A good example would be the Richmond American Homes’ neighborhood of Hager’s Crossing in Hagerstown, Maryland.
If you decide this is the neighborhood for your family, you have the option to choose from one of eight floorplans offered in the community. After the sales presentation and design elements are complete, the sales associate will discuss finance options with you.
Many large- and medium-sized builders offer incentives such as low to no money down, big discounts on upgrades, and even cash back at close if you use their in-house lender and/or title company. Most times these deals are great and difficult for other unaffiliated lenders to compete with. But you should always shop around for lenders before making a final decision. The multiple financing options available for new construction homes is just another reason why more and more Americans are choosing to go to the new construction route. Just remember to do your research on the lender and title company and shop around for rates. You never know, another lender may be able to offer you an even better deal.
