Building your own new home rather than purchasing a "used" home can come with a number of advantages – chief among them the ability to design and customize your home to your exact needs and specifications rather than trying to fit your family and lifestyle into someone else's dream home. However, securing a loan to construct your home can often be more challenging than securing a mortgage on an already-existing home, and it's important to be aware of the differences between these two processes before you get in too deep. Read on to learn more about what you can expect when seeking a construction loan instead of a mortgage.
Be Prepared To Put More Down
While many mortgages are available with a minimal down payment as long as the borrower has sufficient credit or other resources, construction loans are far more likely to require a larger-than-normal down payment. This is due, in large part, to the variance and uncertainty surrounding construction costs; if your general contractor runs into an issue that prevents him or her from completing the project for the initially agreed-upon amount, your bank won't want to be on the hook for a half-finished house.
Fortunately, as long as you're able to show that your income is more than enough to support the construction loan (and any overage costs), you shouldn't need to shell out too much more than you would for a traditional mortgage.
Plan For Hidden Costs
Because construction can come with a number of unanswered questions and unaccounted-for factors, it's crucial to pre-plan as much as you can.
For example, if your ability to afford a construction loan for more than a few months will require you to sell your current residence before moving into your new one, you'll want to have a plan in place to list and sell your home (and relocate into temporary housing) before applying for a construction loan. Doing this will prevent you from having to sell your home for less than you'd like just to get your debt-to-income ratio back under control.
You'll also want to budget for some overage costs. Even the best-laid plans can be pushed aside by weather or scheduling issues, and taking out a loan for only what you think you'll need could leave you scrambling for funds to complete your home if an emergency arises. By building these overage costs into your construction loan, you'll ensure you're well funded for whatever may happen. For more information, contact a business such as The Schueler Group.