I would venture to say that, building a brand new custom home is the American Dream for 90% of citizens. After taking a poll among a classified group, most people do not even think this dream is obtainable and the thought of it seems frightening. I want to put those fears aside today. There are several ways to go about building and financing your custom home.
If you plan on financing your custom home, there are a couple of items to keep in mind.
According to Oxford Languages, “Interim” is defined as, from in or for the intervening period; provisional or temporary.
“an interim arrangement”
Financing an interim construction project generally requires two closings. One closing is for the interim portion of the loan and the next closing will be for the permanent financing, once construction is finished.
So first things first, you need to talk to your trusted lender and derive your budget. If you are a Veteran or currently Active Duty Military, You can also finance your custom home with VA financing. It will be structured very similar. I’ll explain below. Check with your preferred lender to see if they are a qualified VA Mortgage Lender. Recommendations from your trusted Broker/Realtor, family and friends are always reassuring, if you are not sure who to contact.
If you currently own a home, what is your plan? Will you live in your current home while you are building? If you do decide this and need to retrieve th equity from your current home, some lenders can arrange for you to take a home equity loan for your current home. Keep in mind that would possibly mean three closing costs: home equity loan, interim construction loan and permanent financing of your completed home. Unless your current home is paid for and the cash derived from the home equity loan would suffice your entire custom home build, then at that point you would just have one closing, being the home equity loan.
Will you sell your current home to retrieve the equity from your current home and rent a property while you’re building? I have known some people to reside in their RV while they build. Depending on your family dynamics, this could be an option for you or it could be very stressful. RV’s can be fun for a vacation with the family, but keep in mind that an RV that seems very spacious in size on a fun vacation, can start to feel the walls are closing in on you very quickly, especially when living in it for months with children/kids.
Do you currently own land or a residential lot? Is your land/lot paid for or do you still owe on the tract of land? If your land/lot is paid for, guess what? You have equity which can go towards your interim construction loan. If your land/lot is not paid for, your trusted lender will explain their lending procedure. More than likely your lender will refinance the amount owed on the land/lot with your interim construction loan. If you do not own a tract of land or residential lot, you need to find your trusted Broker/Realtor to help you obtain your land, once you have your budget defined. I mentioned this in my last article, I would like to mention this information again. Are you a Texas Veteran? If so, you may qualify for a Texas Land Loan through the VA. The VA requires a minimum of 5% down and an awesome low land interest rate! There is a cap on the amount of money that can be funded for the land. Once again, ask your Broker/Realtor for a trusted VA Mortgage Loan Officer. I like to steer away from .com lenders because you never know who you are going to get and do you really know their integrity? It’s best to have a referral and someone you can actually pick up the phone and be able to call, in my opinion.
Now the fun part…specification plans! You definitely need a trusted home builder. If you do not know a home builder, I would suggest talking to at least three local home builders to receive bids and ask for past Client references. Call the references, talk to family and friends and review every bid with a fine tooth comb. You need to ask questions with the builder, for example, will I be able to pick out my own flooring, appliances, trim, etc. What if you do not want to pick out anything because you loath decisions?! There are a lot of people who do not want the undue stress of picking items out, choosing places where electric plugs go, or other major details. Ask your home builder if they have a designated person that is capable of choosing your items for your home. You also want to ensure you have a completion date stated on your construction contract signed by you and the home builder. Of course things happen, especially mother nature. We can’t always predict rain for two weeks, therefore your slab cannot be poured as expected. But peace of mind to have an approximate date, is worth everything.
Once all the above mentioned are on point, your lender will order an appraisal based upon the completion of specifications and plans. The appraiser will submit the appraisal report to the lender as a proposed appraisal. In layman terms, the appraiser reviews the specifications and plans and derives their opinion of value, as if the home is already built. Once the home is completed, the lender will order a final inspection appraisal report, the appraiser goes back to the Subject property for final inspection and then sends the final appraisal report with the completed home to the lender. This ensures the home is built according to the specifications and plans that the lender and YOU were provided by the contractor/home builder. The lender will also order a survey once the home is completed. I have many people who call or email me requesting a survey. A survey is very different from an appraisal report. A real property survey is a report that indicates the location of improvements relative to the boundaries of a property. Surveys are very important in any real estate transaction. A lender does not always require a survey; however I ALWAYS encourage my real estate Clients to have a survey completed. Encroachments and easements have been unknown and then a problem may arise and no survey was completed. It is just a safe bet to know your boundary lines by a certified and licensed surveyor.
Most lenders have the interim construction loan structured where the customer pays interest only on the amount of money drawn. Interim construction loans are generally “in-house” loans through your local bank. Interim construction loans are not typically sold to Fannie Mae or Freddie Mac. Contractors generally request draws during the building period. Typically, lenders send a third party out to the construction site to make sure the items were completed before releasing the draw to the Contractor. For example, contractor requests a draw for poured concrete foundation and framing. The third party will verify with pictures these items were completed, then the lender will issue the draw request payment to the contractor.
Congratulations, you now have the most beautiful custom home. No matter what size the home is, it is your tailored custom home!! After the final appraisal inspection is completed, survey is completed and both submitted to your lender, you will begin the permanent financing process or better known as a mortgage loan. Typically, it is a fixed rate interest loan and fully amortized with principal and interest payments.
Until next time, happy home and land buying, selling….. AND BUILDING!!