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Build On Your Lot: How Do You Finance It?

May 11, 2020

Build On Your Lot: How Do You Finance It?

You’re ready to build a new home on the land you own. Awesome! So, where do you start? The first thing you want to do is learn the ins and outs of the finance process for building on your lot. Bishard Homes has expertise in building on just about any type of lot you can find. We can even help you find and acquire the perfect lot for your new home in Hampton Roads if you don’t have the land yet. Now, let’s see what financing building on your lot looks like.

Is a construction loan the same as a mortgage?

Not exactly. A construction loan is a short-term loan (usually 12 months) that covers the cost of building your home. At that stage, it’s not a mortgage. When the home is done, the construction loan converts to a standard mortgage, also called an end loan. A land purchase can be included in the construction loan if you haven’t bought your lot yet.

Do you need a construction loan?

You only need to secure a construction loan when you are building a home on undeveloped land—like outside of a developed neighborhood—or on land that is owned by you. If you are having a home built within a neighborhood, the land is usually bundled into the price of the home, so you don’t need a construction loan. Bishard Homes is eager to build in any of these situations.

What does it take to qualify for a construction loan?

Debt to income ratio is one of the primary factors a lender will consider when approving a loan. Lenders will look carefully at the credentials of the builder you’ve hired. Some of them are more reputable than others. Lenders look for a builder they trust because they need to know the home will actually be built. You don’t want the term of your loan to end before the construction is completed, and you certainly don’t want a home that isn’t of high quality. Coastal Towne Mortgage is our preferred lender because of their versatility in financial services, and their competitive interest rates.

The lender will also appraise the home you plan to build, to ensure that its value meets expectations. They will not finance a home that they believe exceeds the appraised value.

You should also plan to provide a higher down payment for a construction loan than you would for a resale home because it’s considered a riskier investment for the lender. If you already own the land where you’re planning to build, you can often use that as collateral. 

What if my home isn’t completed in 12 months?

A reputable builder won’t let this happen, and it can be costly when it does. If your home is delayed beyond the term of the construction loan, you might have to apply for an extension and pay an additional fee. Your interest rates will be higher during construction, so you don’t want to extend this phase unless completely necessary.

Before anything else, Bishard Homes can offer our honest opinion on how to maximize the value of your land. Then, you can go into the financing process with confidence. Contact us about building on your lot and we can get started.

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