Plan Now to Break Ground this Spring
Building your first home can be an exciting — yet, daunting — experience. Before deciding on a location, finding a builder or purchasing a house plan design, you must line up your finances and become more familiar with the various loan options. To help you understand the home buying process, here are a few initial steps to take.
Learn about the Home Buying Process
If you’re not familiar with home building lingo, types of transactions or how to begin the process, consider attending a first-time homebuyer seminar. The U.S. Department of Housing and Urban Development (HUD) maintains a list of home buying resources by state, and it includes these home buying seminars. Another option is to talk to a credit counselor. You want to make sure the counselor does not work with a lender to avoid being influenced by someone who has financial interest in the loan you choose.
Set up a Savings Goal
The conventional route for buyers is to save 20 percent for a mortgage down payment. But there are many other options you can consider as well. The amount needed for a construction loan down payment ranges between 20% to 25%. The specific down payment requirement is determined by the cost of the land and planned construction. If you already own the land, you can use it as equity for your construction loan. You will need to research the agencies to determine qualification requirements and payment options.
Evaluate Your Budget
Take time to learn where you’re currently spending your money and if you can save more. Establishing a timeline can be helpful in determining your savings plan. Do you want to build a home in six months, a year or more? Reducing your spending, increasing your income or both can help you reach your down payment goal faster.
Pay Down Your Debts
Construction loans are considered higher risk and require strong credit. Lenders look at how much of your monthly income is devoted to debt payments, also known as your debt-to-income ratio. In short, lenders want to know if you can pay back a loan and prefer to offer mortgages to individuals with a low debt-to-income ratio. Credit card debt will directly impact the size of the loan for which you qualify.
Calculate Your Monthly Payment
The monthly payment you make on your new construction home is more than the principal and interest. Additional costs can include escrow for property taxes, insurance or a homeowners’ or condominium fee. Especially when trying to build your first home, you want to make sure the total monthly payment is feasible and you can still live comfortably. An experienced real estate agent can be a valuable resource when determining how much home you can afford.
Other Funding for New Construction
Your lender may offer a bridge loan to use while your new home is being built and you're waiting for your current one to sell. While equity in your current home offers this option, it can be an expensive, risky scenario since it's dependent on your current home selling. Visit and research several lenders to understand what loan options are available for you.
An alternate approach is to sell your current home and rent during the new home's construction. This option frees up equity in your home to use towards the new build.
- Joanne Loftus