Even if you are not looking to build a new home in Central Oregon’s Caldera Springs, you will find financing such a plan is not as straightforward as it might be for buying an existing home. Financing new home construction is not a large part of the home lending market. Because of this, the requirements for obtaining a new home construction loan can be an unexpected challenge. So I thought I take the opportunity to discuss some these financing challenges that may await this exciting decision to build a new home.
New Home Construction Mortgages v. Conventional Mortgages
Conventional mortgages for a second home can be challenging enough on their own. Ensuring your credit worthiness is beyond reproach, proving your debt-to-income ratio should have enough room to allow another mortgage costs, and in many cases, providing proof you have enough assets in reserve to make the lender confident in your abilities to meet the terms of the loan all play a role in obtaining financing.
New construction loans add an additional variable to the equation. With no existing home in place, the loan is often constructed in such a way as to allow for the home to be built and, when completed, converted into a traditional mortgage. This type of loan involves coordination between your assets, the builder’s plan and time table, and the banks willingness to partner in the process.
Types of a New Construction Loans
New construction loans can be financed in several ways. You could obtain the loan on your own. These loans are generally short-term affairs, lasting only a year. The interest rate on this type of loan is often variable and set at a higher rate than a permanent mortgage. The lender will often require what is known as “the story”: Detailed plans, a realistic budget, and a construction timetable. During construction, the borrower will only be expected to pay the interest on the loan. Your lender may offer a construction- to-permanent financing option, often seamlessly seguing from construction to traditional financing with only one closing payment.
The builder may also offer financing on the new construction loan. There are several things to consider with this type of arrangement.
On the upside, the builder has the incentive to build the home in a timely fashion, in part because they are paying the interest on the construction loan. You will avoid the complexities of obtaining two loans or making arrangements for a financing-to-permanent mortgage.
The downside is also worth considering. Because the builder has a vested interest in the home, in other words, they are taking the risk, the ability for the home buyer to make changes to the design are often restricted. The builder may not allow some specific customizations if they feel as though it might impact the sale of the home, should you fail to obtain the permanent mortgage at the end of construction. Another downside consideration is the cost of the builder financing. You may not be able to compare the terms the builder’s financing against your bank’s offer with any real accuracy.
How can we assist you today?
On behalf of The Jones Group @ Sunriver Realty
Nola Horton-Jones, Principal Broker/Realtor | ABR, C-RIS, e-PRO, GREEN, RSPS, CCIM Candidate
Bryce Jones, Broker/Realtor | ABR, CRS, e-PRO, GREEN, GRI, RSPS, SFR
Karen Marcy, Broker/Realtor
The Jones Group @ Sunriver Realty | 57057 Beaver Drive | Sunriver, OR 97707
Mobile: 541-420-3725 | Mobile: 541-420-4018 | Mobile: 503-327-9611 | Fax: 541-593-5123
Licensed in Oregon