When building a custom home, you will be required to obtain financing prior to the commencement of construction unless you are paying cash. Construction loans are very similar to traditional mortgage financing. Most lenders will require a minimum of 20% down payment, but there are several local banks that will finance up to 95% of costs depending on your specific circumstances. Typically the land cost will represent at least 20% of the total cost of the home, so if you own your land clear of any debt, you can use the land as your down payment. Also, any deposits you give your builder can be applied towards your down payment. We would recommend using a local lender for construction financing and one that does a single closing at the beginning of construction.
There are several advantages to obtaining a construction loan; first, you are locking your interest rate at the beginning of construction. We are currently in what could be described as a potentially increasing interest rate market. If rates do go down, you still have the ability to refinance anytime after construction is completed. Also, you only pay interest on the funds that are drawn down during construction. For example, if after 30 days of construction the builder has completed $50,000 worth of work, they would draw that amount. In 30 days from the first draw you would pay interest of $190+/- assuming 4.5% mortgage rate. Each month the amount of interest would increase based upon the amount of funds paid from the loan. A good rule of thumb would be to budget 1% of the purchase price for interest expense. Also keep in mind that the interest on a construction loan is typically tax deductible and you will want to verify this with your accountant.
It is always a good idea to meet with a lender prior to buying land and meeting with architects and builders. Here is a list of items you should bring with you to the bank:
1. Last 30 days worth of paycheck stubs.
2. W-2’s for the past two years.
3. Last two months asset verification/bank statements, money market, loans, etc.
4. Two most current years of complete tax returns if self-employed, or if the customer earns commission.
5. Copy of driver’s license(s).
About Jack GesmundoAmerican Village Builders was established with a focus on quality and fairness. We believe in building better homes through quality design and materials, superior craftsmanship, and comprehensive, caring service.
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