If you win the lottery, you won't have to worry about financing your new home. However, most of us need some kind of loan. Your chance of success will depend on how much you have saved, or what you can use for loan collateral. With a construction loan, you pay interest only on what you take out to pay for construction. It doesn't have a specific amount with fixed payments like a mortgage.
Prepare Your Material
Get your information in order before you seek financing. Know how much you'll need for construction of your new home, and how long it will take to finish it. Have complete plans for the new home and the name of the contractor who'll build it. Set aside money for a downpayment, probably at least 5 to 10 percent of the new home cost. Some institutions waive down payments if you own another home with at least 10 percent equity.
Use Construction to Mortgage
Apply for a construction to permanent loan. This is similar to applying for a loan to buy a new home. You'll essentially get a mortgage on the new home, but take out money as you need it during construction and pay interest only on what you have used. You'll have to supply details about the home and its value and demonstrate your financial capabilities. When the house is done, the construction loan converts to a standard mortgage. You'll probably also have to make some downpayment, which will vary whether you get a government-insured loan or use conventional financing.
Get Construction Only
Get a construction-only loan, a line of credit you tap as you need. You'll have to give all the details about the house and its value on completion. You'll draw money out as needed to pay for construction and pay interest only on what you have taken out. You can shop for a full mortgage during construction. When the house is finished, you'll have to pay the construction loan balance and interest from your regular mortgage.
Build a Bridge
Look at a "bridge" loan. This type of loan uses the equity you have in your current house to finance construction of the new home. You actually may wind up with three loans — your current mortgage, the mortgage for the new house when it's done and the bridge loan. Ideally, you pay off the old mortgage and the bridge loan with the new home mortgage. You get better interest for construction because the loan is secured by your equity.
Make Your Lot Security
If you own the land for your new home outright, you can use that as security for a construction loan, then shop for a permanent mortgage on the new home. You'll borrow against the value of the lot to finance construction. This will eliminate the need for a down payment on the construction loan, because you are securing the loan.
- Bankrate.com: How Construction Loans Work
- House Building.com: Home Construction Financing
- Realtor: Building and Remodeling Loan Q&A
- Wells Fargo: New Construction Loans
- Construction Loan Help: Financing To Build A Home
- Defense Credit Union Council: Constructive Financing: Build With a Construction Loan
- The Mortgage Professor: Pitfalls in the Financing of Home Construction
Bob Haring has been a news writer and editor for more than 50 years, mostly with the Associated Press and then as executive editor of the Tulsa, Okla. "World." Since retiring he has written freelance stories and a weekly computer security column. Haring holds a Bachelor of Journalism from the University of Missouri.