What is Construction Financing and how you can use it to your benefit when buying a home.
Construction financing is a method when a borrower contracts the building of the house as opposed to purchasing house.
Construction can be financed in two ways. One is to use two loans, a construction loan for a period of construction followed by a permanent loan from another lender which pays off the construction loan. The borrowers who use two loans must decide whether they will take the construction loan or let the builder do it.
The second approach for construction financing is to take a combination loan which pays for the construction and then becomes permanent at the end of the construction.
Construction loans are usually adjustable rate mortgages that run for six months to a year and have the interest rate adjust monthly or quarterly. In addition to points and closing costs the lenders may also charge the construction people cover the costs in processing the loan. This is because construction lenders payout loan in stages and monitor the progress of the construction. It should be noted that if you decide to take two separate loans then you have to shop for loan twice and pay the associated charges such as the closing costs twice. Whereas taking just one loan means you only take the loan once and incur one set of closing costs.
However, since certain banks will only lend construction loans while the other only permit once you need to shop for both construction loans and government loans at the same time you find a lender who is willing to extend you both.
In shopping for construction loans one must take all factors into consideration and all dimensions of the cost of building the home. Lenders of information loans will typically credit some of the fee paid for the construction was the prominent role. For example a lender may charge for points for the construction loan but then apply three of those points towards the permanent loan. If the borrower takes the permanent loan from another lender however the construction loan lender will retain the points. Combining the costs of the construction loan into the credit of the prominent loan is one of the major discussion points with loan officers were trying to push combination loans.
The rebates offered on a combination alone makes it difficult to compare these with the two known alternative. At the end of today you have to measure not just the monetary benefit but also how competitive the terms and conditions of each program are. If a lender is offering to combine three points from a combination loan into the permanent loan but the terms and conditions of the permanent loan from a second lender are much better than she might perhaps choose to go with another lender for the permanent loan.
Furthermore once you accept a combination loan deal that involves a significant rebate from the construction loan shopping with other lenders for a permanent mortgage of the construction is likely to prove fruitless. So long as the combination lender is not about the market for public close by more than the rebate plus closing cost you cannot do better by finishing the deal with another lender.
This means that in order to evaluate a combination loan you must compare the permanent loan feature with stand alone permanent loans from third-party lenders as well. You shop for construction loans and permanent loans at the same time. If the combination lender is above the market on permanent loan by an amount that is less than the savings of the construction loan plus closing costs you go with the combination loan. Otherwise you could save more with the two loans choice.
Should the Builder Finance Construction
There are certain advantages and disadvantages in having the builder finance the construction of the house. First of all the main advantage is that you will not have to shop for loans or look at a combination loan with suitable terms and conditions. Since the builder will be responsible for financing the construction you just have to take one loan to pay off the builder when the construction is done and it’s time for you to move into the house.
Also, since the builder will probably be paying an interest on the financing he has taken to construct the house it would be in his interest to finished the job as quick as possible. However, the price of the house and price of getting the construction financed by the builder can be slightly higher. This is because the builder has to estimate the amount of time it would take to construct and add that cost of paying interest on financing to the price of the home. His estimate might be slightly on the higher side in order to cover his losses.
Also, in order for the builder to get get financing for construction the title deed will need to be passed on to his name. Getting a title deed transfer back to your name when the construction is completed can be an expensive procedure in certain states. Also the build the maybe reluctant to make any modifications in the design when he is the one who owns the property and on the book for the payment of the loan if he thinks that such modifications would negatively impact the houses marketability in the event that the deal does not fall through.