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Thinking of building a new home? We understand that new home construction can be an unfamiliar process to many, so that’s why we break it down to four main parts to give you a better idea of how it works.
Many people building a new home have an existing home to sell. Good information is critical in this area as you have three options:
Which option should I choose?
We understand that everyone has a different situation, so we give you our take on all three options:
Option #1 is practical for most situations. You sell your existing home and rent on a month-to-month basis. You know your net proceeds exactly and can close on the new home mid‐month and vacate the rental at month end. Many times the rent is less than the previous house payment which allows for additional savings.
Option #2 involves the least stress but the most cost as it requires owning two homes for some period of time. Be sure you qualify for both – your old loan and the new loan, and then decide if you are comfortable making two payments until the old home sells. The benefit is that the moving into the new home can be done at a leisurely pace.
Option #3 is not recommended unless you can close with the buyer of your old home and rent it back until you can move into the new home. This may limit the number of buyers interested in your old home, lowering your proceeds. Also, coordinating the finish of a new home with the closing of an existing home can be a logistical nightmare.
Choosing a builder is a critical decision when it comes to your dream home. First, consider these questions:
These are all good places to start. Additionally, it is a good idea to talk to past clients and subcontractors and ask questions like:
Recently closed clients:
Clients that closed over a year ago:
As far as subcontractors, look for:
Once you have done your homework you will probably find more than one builder who meets your general criteria; at that point we suggest picking the builder you get along with best provided you will work with the builder not the subcontractor. It is a lengthy process and working with someone you are personally comfortable with will make it the best possible experience.
Place
Where to build is always a question; schools, proximity to day care, work, shopping and family can always be considerations. When building you have additional choices, both physical and financial, when it comes to your home site.
Physical: Is it flat, are retaining walls necessary, will my driveway be steep, what about steps, potential drainage issues, do I want sun to melt ice on the driveway, sun angle if a deck or outdoor kitchen is planned, will my plan fit/look good on my lot? If building an acreage, access to water and electrical service, perk test for the septic system and length of driveway are additional factors to consider.
Financial: monthly/annual homeowners association (HOA) dues, level of HOA activity, architectural standards, square-foot minimums, wood roofs, mill levy for property taxes as well as the cost of the acreage considerations listed above.
Plan
When choosing a plan for your new home, in addition to basic family needs, square footage, bedrooms, bathrooms and garages, you should also ask yourself this question: Can I visualize the floor plan from drawings or do I need to walk through an existing home with a similar plan?
Choosing the Plan
A plan a builder has used in the past maybe be less expensive than a brand new design. Many times an existing plan can be modified to create the custom feel without the custom price tag.
If you choose to have an architect design an original plan for you, working with an experienced builder during the design phase may result in cost-saving alternatives for some features. Making those changes before you put the plan out for pricing can streamline the process.
Use the Wish List
Make a list of the 10 things most important to you in a new home, have your partner do the same but separately. Combine and prioritize the list and then work with a builder who can provide a la carte pricing for items on the list. Tip – when setting priorities consider usage; if it something you will use regularly or every day, it is probably an item to be included.
When you are getting ready to build a new home, you have to know that there will be two types of loans involved:
A construction loan – pays the subcontractors on a monthly basis while construction is in process.
The permanent financing – obtained after construction is done and generally thought of as a 30 or 15 year fixed rate loan.
How does a construction loan work?
To illustrate how construction loan works, we use the following example: The lot and home together are $300,000; the construction loan is $240,000 with an interest rate of 5%. On a monthly basis the builder takes advances (draws) on the construction loan to pay for work completed.
First month, home is 10% complete, $30,000 (10% of $300,000) is disbursed to the builder. At the end of that month an interest-only payment is due of $125.00 ($30,000 * .05 / 12 = $125.00). As you can see, you pay the interest only on the amount that has been drawn.
The next month another 15% gets completed, so now the home is 25% complete. The builder then draws another $45,000 ($300,000 * 15% =$45,000). The total amount drawn in two months is $75,000. At the end of that second month an interest-only payment is due of $312.50 ($75,000 * .05 / 12 = $312.50). When the home is completed the construction loan is paid off with the permanent financing.
A fundamental duty of the lender is to keep the amount of funds paid out of the construction loan in balance with the amount of work completed on the home. Ask any lender how draws/advances on the construction loan are handled. Our process includes: a property inspection, title insurance update and a lien waiver signed by the builder – all completed within a couple of days.
Should you do the construction loan in your name or should the builder take out the construction loan?
Benefits of the construction loan in your name: The interest is deductible, the sale price of the lot is the only sale price information sent to the county and the price and transfer of the lot are listed in the newspaper, not what you paid for the home.
Benefits of the builder taking the construction loan: no payments on the construction loan and your down payment can be accumulated during the course of construction.
At i3 Bank, we will make the construction loan to you as the borrower or to the builder. As you talk with lenders be sure both options are available; you want the best fit for your situation, not the best fit for the lender.
Why should I do my construction loan and permanent financing with i3 Bank?
As a small community bank with access to the Federal Home Loan Bank mortgage program, we have the flexibility not possible at larger banks. Main benefits to you are:
One set of closing costs – with i3 Bank you pay one set of closing costs. Other banks charge closing costs on the construction loan and then again on the permanent loan. You build one house, so you should pay one set of closing costs!
Use one appraisal – we will use the same appraisal for the construction loan and the permanent loan. This eliminates the risk of your new home being completed and then having the home appraised for less, creating additional expense and stress.
Learn more
If you decide that the better option for you is to let the builder get the construction loan – that’s not a problem! We will still be more than happy to get you permanent financing when your home is close to being finished.
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