There are a wide variety of loans and terms created to offer the buyer flexibility, but entering the world of new home finance can be tough. You can always start the process by knowing your credit score, having enough savings to cover out of pocket expenses, and knowing how much you can afford to service your monthly mortgage payment. This will be the strongest determining factors when choosing from any of these construction finance options.
Conventional Loan
Conventional Mortgages are not insured or guaranteed by the government and are offered by several lenders. Requirements for qualified borrowers include a pre-set minimum credit score, cash reserves, stable employment, down payment and acceptable Debt to Income Ratio.
As you can expect lower interest rates are offered to borrowers with higher credit scores and some fees charged on FHA loans and VA home loans do not apply with Conventional Mortgage and sellers cannot contribute more than 3% towards closing cost.
Conventional Loans with a Loan to Value ratio of 80% or higher will require private mortgage insurance until the borrower has at least 20% equity in their home. This type of mortgage is the best option for borrowers with the higher credit scores and a minimum of 20% down payment. Always keep under consideration that the actual approval will depend on the lender you work with and your particular situation.
Construction-to-Permanent Loan
With a construction-to-permanent loan, you will initially borrow the money for construction. This is a short-term line of credit that typically comes out in “draws” or periodic withdrawals throughout the building process. With Wausau Homes, there are fewer draws since the bulk of materials and labor is established at the beginning of the project. Once construction is complete, the construction loan then gets refinanced into a home mortgage. The lender transitions the construction loan into a permanent mortgage only after the contractor has completed building the home, and the home will need to be appraised to determine if the home value will hold the value of the mortgage. In this scenario, two loans get rolled into one final loan. This means there are fewer closing fees.
Stand-Alone Construction Loan
In a stand-alone loan scenario, you are issued two separate loans. The first covers payment for construction. The second is a mortgage, which can also be used to pay off the construction loan. These loans sometimes have a lower down payment which can be beneficial is you have plenty of assets but are not cash heavy. You will, however, be paying two sets of fees in this scenario, and if you experience financial hardship during construction, you may have difficulty qualifying for your final mortgage.
Remember to make responsible decisions and to always seek professional advice while applying to secure financing on your new home. These options listed are typically loaned by private institutions, but if you're interested in federally backed loan options click here to read more about loan options from the Federal Housing Administration and the Department of Veteran Affairs.
Speak with Wausau Homes about new construction loans and all available options.