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Financing a Custom Built Home on Land

Many of our friends (clients) ask us about building a home on land that they choose.  This can be a fun process and a way to get exactly what you want, where you want it!  But the process of a custom build can be daunting and financing this type of project has many nuances that you’ll need to understand.

 

Lending on Custom Build FAQ

  • What is different about this type of loan versus a ‘normal’ mortgage?

    • There are several differences in financing when you want to build a custom home on land of your choosing.
      1. You have to find and purchase the land.
        • Searching for the right land is a job all its own.
        • Many people pay cash for their land, but financing is available – usually up to 80% of the purchase price.
        • Loans on undeveloped land typically come with higher rates than standard mortgages.
        • This is only a temporary loan for you until you build.
      2. You have to finance the build.
        • There are two types of financing for a custom build:
          1. A one-time close construction-perm loan.  This involves a single loan that pays off your land loan (if you have one) and gives you the money to build.  Your rate is typically locked up front and there is a draw phase where you draw money to pay the builder as he builds the house.
          2. A construction loan with a permanent loan after completion.  This involves two separate loans – one to give you the money to pay off your land and build your home and a second to pay off the construction loan and be your long-term financing.  Your rate typically is variable during the construction phase and is locked once the house is near completion.
          3. Each of these two programs has distinct advantages and disadvantages that we will be happy to coach you through.
  • How do my costs compare when doing a custom build?

    • This will depend on the financing program you choose, but as a general rule your costs will likely be slightly higher than a standard mortgage.
    • Again, Weber Mortgage is happy to walk you through the ins and outs of the cost of a custom build.
  • What do I need to know about interest rates when doing a custom build?

    1. Rate differences will depend on the program you choose.  Some programs allow you to lock up front and others require that you wait until near your completion date.
    2. You should expect rates on these programs to be very similar to a typical mortgage.  They may be slightly higher due to the additional risk to the Investor, but it shouldn’t be much.
  • Is qualifying for this type of loan harder than a typical mortgage?

    • YES!  Loans for custom build new construction are considered more risky as things can go wrong during the process (mistakes by the Contractor, disagreements between the Owner and the Builder, cost over-runs due to changes by the Owner and many others).
    • Generally speaking, this type of loan requires higher credit scores.
    • Generally speaking, this type of loan requires higher down payments.
  • Is the time frame for this type of financing different than typical mortgages?

    • Yes, sometimes there are multiple loans involved.  There are certainly more steps involved such as getting approval of your chosen Builder/Contractor by the Investor, getting approval of plans and specifications, getting costs estimates from your Builder/Contractor and others.
  • Summary: Understanding the process of building a custom home on land is best achieved through a face to face meeting where we can discuss the differences and answer any specific questions you have (and you will have many).

 

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