Financing Your Dream Build
Building a modular home is an exciting project, with so many styles to choose from and so many dream features to incorporate. You may be a first-time homebuyer or an experienced homeowner. You may also be planning a modular home or a “stick build”. Either way, a construction loan can be as unique as the project you’re financing.
In most cases, your first building decision is how to structure your construction loan. Lenders build construction loans to fit many scenarios. For example, a loan can cover the purchase of new land, or tearing down a house to rebuild on existing land. Keep in mind that interest rates for construction financing tend to be slightly higher than rates for buying an existing home. That is because there’s extra work for both the underwriters and the employees who manage the loan and disburse construction funds for a year or two.
Construction to Permanent Loan
A construction loan is a short-term loan that you use only during the months of construction. Most new home construction loans give you short-term funds to get through the building stage of your project. Then the lender converts it into a permanent long-term loan. Lenders call this a single-closing loan. Bear in mind this is different from a mortgage. It is also separate from the land purchase or land enhancement costs.
This type of construction loan involves only one application and one closing. That closing covers both the construction phase and the permanent financing. As a result, you pay closing costs only once and lock in your interest rate at the beginning. You also lay out all your documentation only once.
Two-closing C-to-P Construction Loan
A two-close construction loan works differently. First, the buyer takes out a construction loan. Then, once the home is complete and has a certificate of occupancy, the buyer needs an “end loan” or permanent financing to buy out the construction loan. The origination and delivery process has several phases, though some steps may overlap or happen at the same time. Bear in mind that the lender for the permanent loan doesn’t need to be the same lender you used for the construction loan. Also, the end loan rate does not lock in until you receive the certificate of occupancy.
Bridge Financing
Bridge loans are short-term arrangements that get you through complicated timing. For example, you may be buying new land and starting the building process before you sell your current house. Frequently, homeowners don’t have cash on hand to carry both at once. In this case, the lender agrees to advance your money, often based on the equity in your current home.
Get Those Ducks in a Row
Before you begin structuring a loan, check your credit report for any inaccuracies or outdated information. Your credit rating plays an important role in the offer you receive from the lender. So you don’t want unpleasant or incorrect information to surprise you late in the process.
Any lender will likely ask for documentation of your employment, income and IRS filings. Lenders often want to see bank accounts, expenses and other assets too. It’s a good idea to pull these together before you even begin talking to lenders about your loan options.
Other things to bear in mind before you begin:
*Have a rough idea for a budget
*Do a little research into the estimated taxes, and the market values of surrounding homes
*Be aware that tear-downs work best if you already have equity accrued in the existing home
*Construction loans apply to additions as well as full builds. And yes, there are such things as modular additions!
*Construction loans are interest-only loans during the months of construction. That means you pay no principal until after you receive the certificate of occupancy and the loan converts to an end loan.
*Modular construction is a faster method of construction. It shrinks the time you need the construction loan, so the buyer saves money on interest-only payments.
Have questions? Interested in learning more? Westchester Modular Homes is happy to talk with you about your construction finance options. Contact us today!
