Financing a new construction home involves several specific steps and considerations compared to buying an existing home. Here we provide a detailed guide on how to finance a new construction home, if that’s the path you’re considering.

1. Get Pre-Approved for a Mortgage

·      Pre-Approval: Before you start house hunting, get pre-approved for a mortgage. This will give you a clear idea of your budget and strengthen your position when negotiating with builders.

·      Credit Check: Ensure your credit score is in good shape, as this will affect your mortgage terms.

2. Understand the Types of Loans Available

·      Construction-to-Permanent Loan: This type of loan combines the construction loan and the permanent mortgage into one. You only have to go through the closing process once, and it typically offers a fixed or adjustable rate for the long term.

·      Stand-Alone Construction Loan: This is a short-term loan used to finance the construction phase. Once the construction is complete, you’ll need to secure a separate mortgage to pay off the construction loan. This involves two sets of closing costs and can require you to qualify for both loans.

·      Builder’s Financing: Some builders offer financing options or incentives if you use their preferred lender. However, make sure to compare these offers with other lenders to ensure you’re getting the best deal.

3. Budget for Construction Costs

·      Down Payment: You’ll typically need a down payment of 20% for a construction loan, though this can vary. Some builders may offer lower down payment options.

·      Contingency Funds: Set aside extra funds to cover unexpected costs or changes during construction.

·      Upgrades and Extras: Factor in the cost of any upgrades or additional features you want to include in your home.

4. Work with a Mortgage Lender

·      Loan Application: Provide your lender with details about your financial situation, including income, debts, and assets.

·      Builder Information: Share details about the builder and the construction contract with your lender.

·      Draw Schedule: Your lender will set up a draw schedule to release funds to the builder in stages based on the construction progress.

5. Monitor Construction Progress

·      Inspections: Your lender may require inspections at various stages of construction to ensure that the work is progressing as planned before releasing additional funds.

·      Documentation: Keep thorough records of all construction-related documents and communication.

6. Finalize the Mortgage

·      Lock-In Rates: If you have a fixed-rate mortgage, lock in your interest rate at the start to protect against rate increases.

·      Closing Costs: Be prepared for closing costs associated with both the construction loan and the permanent mortgage (if applicable). These can include loan origination fees, appraisal fees, and title insurance.

7. Transition to Permanent Financing (if applicable)

·      Conversion Process: If you’re using a stand-alone construction loan, you’ll need to apply for a separate mortgage once construction is complete. This can be a bit more involved, as you’ll need to go through a second round of underwriting and closing.

·      Documentation: Ensure you have all required documentation ready for the permanent mortgage application.

8. Prepare for Post-Construction Costs

·      Final Inspection: Conduct a final inspection to ensure that everything is completed to your satisfaction.

·      Move-In Costs: Budget for any costs associated with moving into your new home, such as furniture, landscaping, or final touch-ups.

9. Stay in Communication with Your Lender

·      Updates: Keep your lender informed of any significant changes during the construction process.

·      Questions: Don’t hesitate to ask questions or seek clarification on any part of the financing process.

Navigating the financing for a new construction home requires careful planning and coordination with both your builder and lender. By staying informed and organized, you can make the process smoother and more manageable. If you’re thinking about purchasing a new construction home, reach out to one of the experienced professionals at Metrowest – we’d love to help you start your journey!