Building your dream home is an exciting venture. From choosing land, to drafting blueprints and designing floor plans, there are many important decisions to make with your home builder. Financing is one of the more complex aspects of building a custom home. Navigating the process of traditional home loans can be complicated, but construction loans present a higher level of complexity. You’ve probably already looked into owner financing, and it’s possible your builder has given you information on their own financing options. Construction-permanent financing and builder financing are the two main types of loans buyers of a custom home must consider.
Construction-permanent financing, or owner financing, provides short-term fund disbursement throughout the stages of construction. This type of loan is underwritten to last the duration it takes to build the home. Owner financing works by giving buyers an initial line of credit and an installment schedule for loan draws. For example, the first draw, say 15% of the total loan, is allotted for lot preparation and foundation work. Next, 20% may be drawn for framing. Additional draws follow over the remaining months. Between each draw, the lender inspects the site for progress and compliance with building codes before more credit is withdrawn. Once the home is finished the construction loan becomes the permanent loan.
The other option is builder financing. Essentially, this is borrowing directly through the home builder’s lender either from their own mortgage subsidiary or affiliate relationships with outside mortgage companies. The builder carries the loan through construction, and once the home is complete, the buyer obtains end loan financing. These packages often seem appealing to homeowners because the builder’s involvement on the financial side is reassuring. The builder doesn’t have to wait for the buyer’s lender to disperse funds and conduct inspections. Builder financing may reduce the time needed to proceed through loan stages.
Both options are practical ways to fund the construction of your new custom home. However, in most cases, construction-permanent financing is less expensive, more convenient and a better solution for the homeowner. Here are some of the benefits of obtaining a construction-permanent loan:
- During the loan application process, the buyer has greater opportunity to lock in a lower interest rate.
- Closing on a construction-permanent loan is faster and less stressful because there is only one closing required.
- Construction-permanent is a packaged deal—land, construction and mortgage— combined into a single loan.
- Offers the potential for an interest-only payment structure during construction.
Highland Builders has you covered in all aspects of building your dream home. Whether you’re interested in builder financing options, or have already obtained owner financing, our experienced designers, architects and contractors are anxious to bring your vision to life. For more information on building custom homes, contact Highland Builders today.
