At some point in our conversations with homeowners looking to custom build, the topic of financing comes up. The question usually goes something like this: “We really want to have our ideal home built for us, but we’re stressing out on the mortgage loan process. What do we do?”
At Foley, we understand. To help clients put it all in perspective, we start by pointing out that many homeowners before them have gone through the same process and came out on the other side with the home of their dreams.
Building a custom home has some built-in stressors, but financing doesn’t need to be one of them. Securing a mortgage loan for your Northern Virginia custom home can be a complex process, but financing for a custom home build is easier if you understand what’s involved.
Know Before You Owe
First, some good news. In October of 2015, The Consumer Financial Protection Bureau (CFPB), established a new set of federal rules for mortgage lenders. “Know Before You Owe,” makes it much easier for new homeowners to shop for the best loan.
Under the CFPB rules, now when you apply for a home loan, the lender has three days to in which to send you a written offer. And that offer must contain a lot of details so you can compare competing offers. To use the new rules to your advantage, work with a lender both you and your builder trust.
New Home Construction Loans
The traditional mortgage process is simple and straightforward. Construction loans, though, can be a bit more confusing, particularly for homeowners building their first custom home.
Let’s take a brief look at some of the inner workings of a new construction loan, which we hope will put your mind more at ease.
The major difference between traditional home mortgages and construction loans is that a construction loan is meant to last only for the length of time it takes to complete actual construction.
It might help to think of your construction loan as a temporary credit card the lender issues that is only valid for a fixed time. Construction costs are charged to this separate line of credit and advanced to the builder, with only interest due on what is used.
When construction is completed, the charges roll over into your more traditional fixed-rate mortgage.
There are two ways to finance new construction:
- One-step loans, sometimes referred to as simple close loans; and
- Two-step loans, which are usually the best choice for people building custom homes.
One-step loans are just that – you obtain your construction loan and mortgage from the same lender. While these are perfectly acceptable loans, you need to be certain of the final cost. A Northern Virginia custom home, with all its variables, can make it difficult to know upfront your exact final price.
Two-step loans give you more flexibility with the final cost of your custom home. Changes are common with any home construction, but custom builds come with more than the norm. Splitting up the construction loan and the mortgage allows you to make changes to the scope of construction and builds in protection for any delays that might occur due to weather or other unforeseen circumstances.
Custom Home Financing in Northern Virginia
In Northern Virginia, homeowners typically obtain a very specialized type of financing called a land acquisition/construction/permanent loan. Over the years, we have established good working relationships with a number of lenders who offer these types of loans, and we are happy to provide you with a list of those who will treat you fairly and explain the process.