Many dream of moving into a brand new home, but wonder how much it costs to build a new house. Besides the builder cost for the foundation, roof, framing, and custom upgrades, do not forget about the construction down payment, rate, and closing costs. Often, the cash to close creates too much of a hurdle to build. That is where low down payment construction loans prove beneficial. Actually, current landowners may build a home with no down payment by using lot equity. Fortunately, we offer several strong construction to permanent bank products to meet these needs. Below, we provide answers to “How does a construction work?”.
Construction Loan Options
- VA Loans – No down payment
- Conforming Loans – Up to 95% financing
- Second Home Loans – Up to 90% financing
- FHA Loans – Up to 96.5% financing
Each financing option to build a home offers its own benefits and advantages. Additionally, all options are available to borrowers that already own land or that purchase the land through the construction closing.
No Down Payment VA Construction Loan
VA eligible servicemembers, military Veterans, or qualified surviving spouses have a wonderful home loan option for new construction. With full entitlement available, someone may finance 100% of the construction cost and land price (if buying the land) up to any amount. That’s right, a no down payment construction loan! Also depending on the build plus land cost and the VA entitlement available, it still may be no money down. But even those using bonus entitlement could still use a VA loan, although there could be a required down payment.
VA Builder ID
In order to use a VA construction loan to build new construction, the builder must have a VA builder ID. Thus, the builder is eligible to build a home for a VA guaranteed loan. Not sure if your builder has a VA builder ID? Check here to look up VA eligible builder or to become a VA eligible builder.
These VA construction loans are executed as a two time close. In addition to no down payment, VA loans have several advantages including no monthly PMI, no loan limit with full entitlement, great interest rates, and flexible underwriting guidelines to help more qualify. Finally, the military and their families are able to build a custom home that not only has affordable payments, but also beats the struggle of large down payments required by many other construction lenders.
We offer VA construction loans for building a new home or major renovations in NC, SC, VA, and MD.
Conforming Construction Loans
So, what if you are not VA eligible? There is still a great option to build a new home that provides many solutions. Conventional / conforming construction loans help build a principal residence or a second home. Furthermore, it offers a low down payment if desired – 95% financing for a primary residence and 90% financing for a vacation home. Other benefits include the ability to have one closing and a choice of extended rate lock or interest rate cap. Below we explain a detailed comparison for these construction rate options.
Those looking to build a house may get approved with as low as a 640 credit score. Furthermore, these loans may extend up to the maximum conforming loan limits. For 2020, the conforming construction loan limits for single family homes is $510,400. Which means being able to build quite a house. Remember, a higher down payment allows for building a higher priced home as long as the loan amount stays within this range.
FHA Construction Loan Details
Finally, there is the FHA construction loan which allows as low as a 3.5% down payment or using equity in land to build with no down payment. FHA financing includes a one-time or two-time closing option. Just like a traditional FHA loan to purchase or refinance a home, FHA construction loans are very flexible with qualification guidelines. Equal to the other construction options, the minimum credit score is 640. Although conventional and FHA both allow a 640 score, FHA may be easier to get an approval.
No matter a borrower’s scenario, we have these construction options available to help so many construction projects.
Construction Loan Rates
Timewise, building a home is a lot different than buying a home. Buying a home may just require a 30 day rate lock. Although building a house may take 6 – 12 months. Therefore, locking an interest rate is a lot different. Predicting interest rates for a shorter period is easier. Yet the further out the building completion date, the harder it is for borrowers and lenders to determine rate directions. So, there are two main interest rate types which include construction interest rates and the permanent loan rate.
Construction Interest Only Rate
Prior to start of construction, there is the construction closing. Between the construction and permanent loan closings, the borrower pays a minimum interest only payment on the outstanding balance each month. The interest rate during the construction period depends on the permanent mortgage product being used. If the borrower chooses an extended rate lock or interest rate cap option, that is also the construction interest rate. Plus, it does not fluctuate during construction.
If the permanent loan interest rate is not set, otherwise floating, typically the construction interest rate is set at the rate which the borrower is qualified for on the permanent loan.
Either way, the construction loan interest rates are great. Often equal to or less than the Prime interest rate.
Permanent Loan Interest Rates
Once the home is complete, the permanent loan steps in to pay off the construction loan. We offer several options for interest rates and the options may depend on the loan product. For instance, the conventional construction loans for primary residence and second homes offer an extended rate lock, interest rate cap, or just floating the interest rate.
Extended Rate Lock
On the conventional construction perm mortgage, a borrower may choose to lock their permanent interest rate prior to the construction closing. This lock may be up to 180 days or roughly 6 months. If the extended rate lock option is chosen, there is a fee due at lock. For example, locking for 6 months costs 1/2% of the loan amount.
Interest Rate Cap
Another option on the one-time close conventional construction loan is the interest rate cap. Protecting against a large interest rate increase is its primary purpose. Accompanying the rate cap is a free rate float down. The float down policy provides the ability to take advantage if rates just before home completion are better than the rate cap. Therefore, combining the rate cap plus the float down, protects from increases while potentially taking advantage of a rate drop.
Floating Interest Rate
When choosing a two time close construction loan, the permanent mortgage interest rate is floating. This means the interest rate is not capped nor locked. Any of the construction lending options may be a two time close and currently the VA loan is only offered as a two time closing.
If building a home is your goal, contact us to find a construction loan solution.