Building a home isn’t like buying a home, and the mortgage you will have to take out will differ considerably. Don’t let that deter you, however: if you keep the basics in mind, navigating the process will be much easier than it may at first appear.
The first thing to understand is that the mortgage you need to take out on a home building project will be threefold; that is, you will need a loan for the purchase of the land, the construction of the home, and the permanent financing for the home post construction.
Lenders are likely to be most hesitant about the first loan, as land can be difficult to resell if your plan falls through. Because of this, you may be faced with a large down payment, which you should pay in cash if at all possible, and high interest rates.
If you already own the land you intend to build on, or if you are able to pay for the land straight up, you will of course skip this first loan. In this case, talk to your lender about the possibility of merging the construction loan and permanent finance loan.
The next aspect of a mortgage to consider is the loan for construction funds. When looking for lenders, make sure you find one that will cover this, because not all will. Also, make sure you are already working closely with your contractor, and that you have all your paperwork in place. Blueprints and permits are going to be required, as well as verification that your contractor is licensed and bonded.
The last loan is more similar to one that you would take out on a pre-built home. This loan goes into effect once the construction financing ends, when the house is fully built, and is almost always a permanent loan.
Different lenders go about this process different ways, however, and these three loans are subject to change based on who you go to. For example, some lenders may opt for a rollover loan, which would merge all of these into one package. This way, you only have to qualify and to fill out paperwork for one loan, saving you money on legal aid.
However you go about your loans, it is important that you make sure you have the best lender for your situation beforehand. Look around for a while on the internet, and talk to your contractor, to get their opinion. Eplans.com goes into more detail about mortgage basics for building a home at: http://www.eplans.com/community/mortgage-basics-for-building-a-home.
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