Financing A Custom Home

Dated: 02/24/2017

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How Do Custom Home Loans Work? 

Many people in the South Texas area want to build a custom home on a piece of land, but are discouraged by the complexity of a custom home loan. Yes, it can be a lengthy process. Yes, it can be frustrating at times. Would you endure it for the home of your dreams? Let me explain what happens.

  1. Hire a real estate agent who has experience in custom home building.

  2. Meet with a lender who also has experience in custom home building.

  3. Get pre-qualified for a land loan and a construction loan. These can be “rolled up” into a single mortgage after the home is completed.

  4. Interview several custom home builders for quotes. Check their references and visit their homes to examine workmanship.

  5. Builders may require a down payment from $2,000-$10,000 upon hiring. This is not part of the loan. It comes from your pocket, but it is deducted from the overall cost of the home.

  6. Find the perfect lot. Your builder and real estate agent can help. If you already know the preferred neighborhood but there are not many lots available, ask your real estate agent to contact the owners of lots that interest you. Sometimes you can find an owner who is willing to sell. Your builder may ask for an official survey before purchasing the land to ensure it is buildable and within your budget.

  7. Purchase the lot. If it’s in a neighborhood, pay attention to the building restrictions. Some neighborhoods require you to start building within a certain timeframe.

  8. If you want to build right away, ask your lender for a dual-closing on the land and construction loans. This saves money on extra closing costs. Most banks will only finance 80-85% of the full amount, so you will need to put down the difference at the time of the construction loan. Alternatively, you can pause here to pay down the land loan by itself. In that case, you pay a full loan payment on the land only until you take out a construction loan.

  9. If you have both the land and construction loans, you will pay interest only during home building. This process averages 6-10 months. Initially, the interest payments will be very small – maybe only $30 per month. The builder will request a “draw” at various stages. Basically, you “draw” money from the construction loan to pay the builder. The more money you use from the loan, the larger your interest payment will become. In the final months of home construction, expect to pay several hundred dollars.

  10. Close on your custom home. When your masterpiece is finished and all corrections are finalized, you will have another closing. Work with your builder to determine any overages from the construction phase. Those are paid out-of-pocket at final closing. The land and construction loans can be combined into a conventional loan and escrow can be established for tax purposes. This is your final mortgage for the custom home.

It seems overwhelming when it’s written out, but don’t let that scare you away! You just need the right team to get you there. If you have further questions, please don’t hesitate to contact me.

Linda Piercy, REALTOR® and Homes for Heroes Affiliate

Cell: 469-396-6337   Email: [email protected]

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