Building a new home is a dream shared by many couples. However, most people who realize this dream cannot do so without obtaining construction financing from a lender. Although carrying a mortgage on another home doesn't prevent you from building a new one at the same time, it can make the process more difficult.
About Construction Loans
A construction loan is used to finance the construction process of a new home. Unlike standard mortgages, lenders approve construction loans based on the information you give them about the home you plan to build, as opposed to the value of an existing home. Two primary types of construction loans exist: construction-only financing and construction-to-permanent financing. Construction-only financing covers only the construction process and must be paid in full when the process is complete, usually by taking out a standard mortgage. Construction-to-permanent financing, on the other hand, automatically converts to a standard mortgage after construction is over. Lenders won't approve either type of financing unless they believe you can afford the mortgage payment you will owe after the home is built.
Keeping Current Home
If you plan to keep your current home during and after the construction process, you won't be able to build a new home unless you can afford to pay both mortgages. The lender will determine whether you can afford both mortgages by analyzing your debt-to-income ratio, the ratio of your revolving debts to your gross monthly income. Revolving debts include credit cards, auto loans, student loans and mortgages.
Selling Current Home
If you plan to sell your current home before you move into the new home you're building, you may be able to qualify for a construction loan even if you wouldn't be able to afford both mortgage payments at once. To qualify for a construction loan under these circumstances, you must typically provide the lender with a sales contract showing that your current home will be sold before you begin paying the mortgage for the new house. Some lenders may even require you to close the sale before they approve the loan.
If the lender determines that you're able to afford both your current mortgage and new mortgage at once, you can begin building your new home regardless of whether you plan to keep or sell your current home. If you plan to rent your current home out after you move, you may be able to use the future rental income to reduce your debt-to-income ratio, as long as you can show the lender a signed lease.