How a Home Builder Loan is Different from a Regular Mortgage
When you decide to work with home builders on the construction of a new home, you will probably start looking for ways to finance the project. New construction home loans are slightly different from regular mortgages, so make sure you are aware of how the new construction loan process works.
Step 1: Create your plan
Before you speak with a mortgage broker, you should develop a vision for your new home. Decide its size, scale and location. Also, consider factors that could make the project more complex. For example, if you decide you want solar panels or geothermal power, then your project may require special sources of financing before homebuilders can get started.
Step 2: Research your loan options
Although new construction has increased significantly as the inventory of available homes has dwindled, many lenders have moved away from new construction during the economic downturn. Some of these lenders left their clients without financing in the middle of the construction project. Do some research to make sure your lender is reputable.
In addition to making sure your lender is in good financial standing, you’ll also want to shop around for the best interest rates available when shopping for a loan. To save time, a mortgage broker can search several lenders to help you find the best fit.
Step 3: Perform a builder review
Once you’ve selected an appropriate lender, your lender typically begins researching your chosen construction company by running a credit check. The lender may also contact subcontractors who have worked for the company to ensure that it is reputable. Before starting the process, you should have some pre-permit architectural plans and an estimate for your project. Also, provide your lender with a draft contract.
Step 4: Project Review
While your lender’s underwriter reviews your application, a project review specialist typically reviews your new construction plans. The reviewer may make plans that can reduce your project budget, or your reviewer may find important items that the construction company has overlooked. Be sure to include some sort of contingency line item in your loan documents to cover any lost items. This line item can help prevent you from incurring out-of-pocket costs.
Step 5: Loan approval
When you receive a loan commitment letter, your application, builder review, and project review are usually successful. Before funds are released to home builders, the insurer may request a few small items. These items include missing signatures, property insurance updates, and additional documentation.
Step 6: Loan Closing
After your loan is approved, your lender typically hands the documents over to a closing agent, such as an escrow officer, title agent, or real estate attorney. Once the agent investigates the title, obtains the title insurance, and prepares a closing estimate, your lender usually prepares the closing documents so that she can sign all the paperwork. While new construction loans require a few extra steps, you’ll appreciate having a home built exactly to your specifications.