Maybe you have a clear vision of your dream home: the very latest in energy efficiency! Shiny new granite countertops in just the right color!
Or maybe you live someplace where the existing housing stock just isn’t sufficient to meet the demands of your rapidly growing community. In plenty of places in the country, buying a newly constructed home is more feasible and less expensive than waiting around for the right currently occupied home to go on the market.
There are plenty of reasons people choose to buy newly constructed homes. If you’re thinking about purchasing a new home, there are a few additional considerations you’ll want to keep in mind when it comes to your mortgage.
New Construction Mortgages and Construction Loans Are Not the Same
So you’re dreaming about buying an empty lot and hiring an architect and a contractor. We’re happy to report that it is definitely possible to get lender financing to construct a new home from the ground up. But! A loan to construct a home and a mortgage for a newly built home are two very different things.
For one thing, getting approval for a construction loan is tougher than being approved for your everyday, run-of-the-mill mortgage.
With a regular mortgage, your home is collateral on the loan. If your relationship with your lender goes south and you can’t pay your mortgage, your lender at least has a home they could sell to recoup some or all of their losses. For a construction loan, a home doesn’t yet exist. So lenders are more cautious about lending money to build homes than they are about lending mortgages to buy them.
Getting a Construction Loan
If you do decide to go for a construction loan, you’ll need excellent credit and a sizable down payment. Think something in the 20% to 30% range. You can also expect a thorough review of your finances and construction plan. Not to mention multiple check-ins and appraisals from your lender as construction proceeds (hopefully on schedule).
Not every mortgage lender offers construction loans, so you’ll need to shop around. Construction loans usually have relatively short terms—a year or so is pretty standard. At the end of the term, the full construction loan needs to be repaid to the lender. Construction loans also generally have higher interest rates than mortgages: again, they’re a higher risk for lenders.
Most folks who get a loan to construct a home convert that loan into a mortgage once the home has been built.
What’s Different About Mortgages for New Construction
With any mortgage, your lender is going to want a professional to appraise the home being purchased. An appraiser will also make sure that the home with be worth at least as much as the homebuyer is borrowing to pay for it.
With a newly-constructed home, the appraisal process gets a little bit tricky. Most appraisers for newly-constructed homes will calculate the value of the home based on the cost of the actual land, labor, and material going into the home’s construction. Your lender will probably want copies of the builder’s plans, blueprints, building specs, and itemized cost breakdowns. Inspectors or appraisers may need access to the home a few times during the construction process. And of course, your lender can’t finalize your mortgage until the finished home passes a final inspection and appraisal.
Anyone who has built anything knows that sometimes, construction projects fall behind schedule. Days turn into a few weeks: a few weeks becomes a few months. When you apply for a mortgage, a lender will offer you a set interest rate that’s good for a limited period of time. So, if you’re purchasing a home that’s not quite complete? Pay extra attention to the length of time you’ve got for your rate lock. If the final construction takes longer than you anticipated, you may need to negotiate an extension. Be ready for an interest rate that’s different than your initial offer. (Getting some help navigating these sorts of issues is a good reason to work with Morty.)
… And What’s Not Different
Aside from questions related to timing and appraisals, getting a mortgage for new construction isn’t much different from getting any mortgage.
You’ll want to make sure your credit is in tip-top shape before you begin the process. And you’ll also want to be doubly sure not to make any major financial changes that could impact your credit score or debt-to-income calculations in the weeks and months between your initial mortgage application and closing time. Accidentally forgetting to pay a credit card bill, changing jobs, or making a major purchase could jeopardize your mortgage. For newly constructed homes, the process can take a few months. It’s easy to make a mistake if you aren’t careful.
Whether you’re interested in purchasing a brand new home, or decide to go with a currently existing home, getting a mortgage pre-approval first can help you know with confidence exactly how much home you can afford. If you’re ready to start your home buying journey, we’re ready to help.