How Do New Home Construction Loans Work?

There are numerous paths to the new custom Florida home of your dreams, and while they all involve a financial transaction, you have more options than you might think.

Most of us buy our homes via a loan. The array of choices can be overwhelming, especially for first-time home buyers. But the most common loan — a mortgage — isn’t the only path.

home construction loanEnter the new-home construction loan. This loan goes into effect prior to construction and finances the building of your new custom Florida home. Once your home is finished and you’re ready to move in, you’re required to pay off the remainder of the costs of your new home (principal and interest). You have multiple options for that part too.

Read on for more on how new-home construction loans work.

What home construction loans are

As mentioned, a new-home construction loan finances the building of your new custom Florida home. It includes the purchase of the lot or homesite, or land if the home isn’t being built in a master-planned community or neighborhood. The loan must be acquired prior to any new residential construction.

A new-home construction loan can be a solid option for buyers who don’t own a home, and thus can’t use the sale of an existing home as collateral for a mortgage.

There are two types of new-home construction loans. One is a standalone construction loan. It’s a short-term loan (typically a year or less) that only finances the new home’s construction. The other is a construction-to-permanent loan which transforms into the traditional mortgage loan once construction is complete.

How they work

Because a new-home construction loan only finances the building process of your new custom Florida home, you must provide potential lenders with a construction timeline, blueprints, and budget estimates in your loan application process.

Once approved, the lender releases funds to the builder during the construction timeline to keep the process humming. The lender’s inspector visits the construction site on a regular basis and determines its progress (and when funds should be released).

You, the future homeowner, only pay the interest on those funds during construction.

home construction loanThings to know

If you opt for a standalone construction loan, you’ll likely need to apply for a mortgage loan to pay for your new home’s principal and interest after construction is completed. This means two closing procedures and two sets of closing costs.

If you opt for a permanent-to-construction loan, it evolves into a mortgage loan, which can be 15 or 30 years, with a fixed or adjustable-rate interest rate. You’ll also only have one closing procedure and attendant costs.

Expect a higher interest rate with a new-home construction loan because of the (likely) lack of collateral (an existing home). Lenders tend to see this as a higher risk. Being in solid financial shape and making a solid down payment (20 percent is the industry standard) is also important.

Ready for your new custom Florida home? Talk to ICI Homes here.