How do New Construction Home Loans Work?

September 26th, 2022 | by Tim Rawlings

The housing market has been giving every buyer and new home builder a serious case of whiplash over the last few years. Inventory, prices, and rates seem like they’re changing quicker than anyone can keep up. 

If you’re trying to buy a home but are thinking about going the new construction route, you’ve got a lot to plan! But we also think it’s a great, non-traditional way to create a place that you can call your own.

The most obvious benefit to buying a newly constructed home is that everything is new! New construction homes also tend to have more energy-efficient appliances and building materials, which can save you money on your utility bills.

Additionally, many new home builders are offering buyers upgraded features that most consider luxury items, like granite countertops and stainless steel appliances, as standard features in their homes. This means that you can get a home with all of the bells and whistles without having to pay a premium price.

For anyone thinking about buying a new construction home, it’s important to understand how the process works and what type of loan is best for you. Keep reading to learn more about new construction home loans and how they work.

What is a New Construction Home Loan?

A new construction home loan helps cover the costs of building or repairing a home. There are two main types of new construction home loans: construction-to-permanent (C2P) loans and stand-alone construction loans.

Construction-to-permanent loans are the most common type of new construction home loan. With this type of loan, you borrow money to pay for the cost of building the home. Once the home is completed, the loan will be converted into a permanent mortgage.

With a stand-alone construction loan, you don’t have to worry about converting the loan into a mortgage later on. You can use this type of loan to pay for the cost of building the home and then get a new mortgage when the home is finished.

How Do I Find a Good Construction Lender?

The first step in getting a new construction home loan is finding a good construction lender. Not all lenders offer construction loans, so you’ll need to shop around to find one that does.

When you’re looking for a construction lender, it’s important to compare offers from multiple lenders. You should look at the interest rates, fees, and terms of each loan. It’s also a good idea to talk to friends or family who have recently gone through the process of getting a construction loan to see if they have any recommendations, also talk to your new home builder. They can give you a list of ones they have worked with in the past.

Once you’ve found a few potential lenders, it’s time to start the application process.

How Do I Qualify for a New Construction Loan?

The qualifications for a new construction loan are typically stricter than for a traditional mortgage. In general, you’ll need to have a little better credit, a steady income, and at 3.5% saved for a down payment or have equity in your land.

Lenders have higher requirements for construction loans because there’s not an existing home that they can use for collateral. So if you’re short on cash, this isn’t the way to go. If you qualify for a loan from the Federal Housing Administration, Veterans Affairs, or U.S. Department of Agriculture, you may be able to put less down and have a lower credit score lower than 720.

When Should I Buy the Land?

If you already own some land, any equity you have in the land can count toward a down payment and closing costs. If you’re still looking for land to buy, it’s best to do that before you start the construction loan process.

The reason for this is that the value of the land will be included in the overall value of the property. So if you wait to purchase the land after you’ve already started construction, your lender will only appraise the value of the house, not the land.

What Types of Fees Are Associated with New Construction Home Loans?

There are a few different types of fees associated with new construction home loans: origination fees, appraisal fees, and closing costs.

Origination fees are typically 1% of the loan amount and are paid to the lender when you close on the loan. Appraisal fees vary depending on the value of the property, but they typically range from $300 to $500. And closing costs can range from 2% to 5% of the loan amount.

Keep in mind that these are just estimates, and your actual fees may be higher or lower depending on your situation.

Tips for Staying on Budget

Building a home can be an exciting process, but it’s easy to spend much more than you were expecting. Here are a few tips to help you do that:

  • Make a realistic budget before you start construction and try to stick to it as much as possible.
  • Look for a new home builder that does not have escalators for poor estimating.
  • Keep track of all your expenses throughout the construction process.
  • Don’t make any changes to the plans without approval from your lender.

Ditch Hidden Fees and Subpar Homes with Build On Your Land

A home is one of the most important investments you’ll ever make: it doesn’t just take money, but time, effort, and emotion. So when you’re ready to build your dream home, it’s important to work with a company that you can trust.

Build On Your Land is a leading new home builder in South Carolina, and we’re committed to helping our customers build the home they’ve always wanted. We offer a variety of floor plans and customization options, so you can create a home that’s truly unique. Plus, we have a team of experienced professionals who will guide you through every step of the process, from financing to construction to moving in.

Come visit us at one of our showrooms in Columbia or Aiken, SC or schedule an appointment to speak with a building advisor today about getting your build started!