Building a New Home?
There are 2 main options when it comes to financing new construction. The first option is to let the builder finance the construction and the second is to finance the construction yourself.
Builder Financed New Home
Under this option, the builder will finance the purchase of the lot or land and the construction of the actual property. This option is more common when dealing with large builders and builders of “spec” homes. You will be required to get permanent financing arranged to pay off the builder and “purchase” the finished product. This type of loan is essentially treated as any other normal loan that we do. The only major difference is that you will need to do some type of “extended lock” on the interest rate. The main reason for doing the extended lock is to prevent any change in interest rate to the end loan. It would be very difficult to have your new home built and then find out in the end you no longer qualified for the house because of a change in interest rates.
We offer extended interest rate locks on new construction loans from 90 days to one year. Typically you will need to pay a “non-refundable upfront lock fee” to guarantee the rate through the term of the construction. Up front lock fees vary by lender and can range from .50% of the loan amount to 2.00% of the loan amount depending on the length of the extended lock. Some extended locks also carry a “float down” feature. If the interest rate market would improve, you can “re-lock” the loan for one time prior to closing for free. If the interest rate market would go against you, you are protected with the extended lock and you would get the rate that you originally locked at.
Self-Financed New Home
Under this option, you would finance the purchase of the lot and the construction of the home. This option is more common when you are working with a custom builder. This can really be a 2 or 3 step loan.
- Step 1 is typically to purchase the lot. Typically on a lot purchase you will need to put 10% down if you are not planning on building right away. If you are planning on building right away, you can combine Step 1 and Step 2 and go right into a construction to perm loan. Your first draw on the construction loan would go to “purchase” the lot.
- Step 2, the construction to perm portion of the loan is typically set up with one of our local bank contacts. These loans are typically set up as interest only payments and you will only pay on what you have drawn. Some banks will even offer what is called an “interest reserve” to be built into the loan so you have no “out of pocket” payments. They will handle all the draw requests and inspections to make sure the construction of the house is proceeding. When we set up this type of loan, the bank typically wants to know if we have end financing approved. Under a lot of scenarios, we are even able to treat it as a “package deal” and do a one time close with a modification agreement at the end. The reason for doing the one time close is to save $$ on closing costs.
- Step 3, would be to arrange that end financing. Again, we are back to doing some type of extended lock and choosing the type of end financing that you want on your home. We offer extended interest rate locks on new construction loans from 90 days to one year. Typically you will need to pay a “non-refundable upfront lock fee” to guarantee the rate through the term of the construction. Up front lock fees vary by lender and can range from .50% of the loan amount to 2.00% of the loan amount depending on the length of the extended lock. Some extended locks also carry a “float down” feature. If the interest rate market would improve, you can “re-lock” the loan for one time prior to closing for free. If the interest rate market would go against you, you are protected with the extended lock and you would get the rate that you originally locked at.
If you have any specific questions about our guarantees,
call us direct @ 612-636-6380 or e-mail me at jason@mnloanstore.com
call us direct @ 612-636-6380 or e-mail me at jason@mnloanstore.com
