Home Construction Loans 101
Once you’ve decided that you’re ready to build your dream home, you may be wondering what to do next. Should you start looking for land, housing inspiration on Pinterest, or talking to a lender? There are many questions and resources that can be confusing, so we are here to help!
Below, you will find helpful information on how to prepare for a building project, how to research contractors/builders, construction loans with Farm Credit, and what the loan closing process entails.
Bonus: Scroll to the bottom for a free educational resource and a chance to connect with one of our lenders!
Where do I Start?
Congratulations – you’re ready to build! If you don’t already own land to build on, we can discuss financing the land with the construction at the same time. For this to happen, you will have to have the construction contract and blueprints ready to go up front.
Once you bought the land, you’ll want to get to know potential builders to determine who you’re most comfortable with. We recommend researching local companies and looking at their previous work. Start with a quick internet search or request referrals so you can speak with a client they have serviced in the past. If you have the opportunity, you may want to walk through properties they are currently building. If you’re struggling with locating a builder, our team of experts can recommend someone in your local area.
We do require a licensed contractor to serve as your general contractor through the whole process, and highly recommend finding current or past projects the builder has worked on so that you can see their work firsthand and determine if it fits your needs and wants. We try our best to prepare our customers looking to build, and sometimes they are unaware of how long the process can take. We recommend working with a trusted builder to ensure you have an open and honest conversation about what you are looking to build and what expectations to have.
The cost of construction has also increased over the last few years so it may be more expensive than you are expecting. Working with a builder from the beginning helps you construct a budget, set expectations, and then discuss your options with lenders.
What to Research: Builder and Contractor Edition
Once you’ve identified the builder you plan to work with, it’s best to be as prepared as possible for the first meeting, including developing a list of things you would like to discuss. Below are a few examples:
- What type of home are you looking to build? Stick built, modular, timber, etc.?
- Does the contract include everything for a “turnkey” construction contract or will parts of it need to be subcontracted out?
- What kind of warranties do they offer?
- Do they have any referrals or testimonies that they can offer?
Doing your research ahead of time will ensure that you are working with a reliable and reputable builder. As a reminder, we do require a licensed contractor to work as your general contractor. We do not allow self-building.
Construction Loans with Farm Credit
At Farm Credit, portfolio loans are financed at 80% of the appraised value. If you do not have the equity in the property or cash to supplement the 20% down payment, we can explore secondary mortgage market construction loans that typically can finance up to 95%. Be sure to have a detailed contract with your builder before working with lenders because the appraiser will depend on these details to give an accurate value of the property.
Farm Credit will finance up to 80% of the overall appraised value of the property “as if” the house is already built. We are able to use any existing equity from the property to go towards the down payment. It is a good idea to have an estimate or proposal written up for the construction project. Farm Credit requires 10% of the cost of construction available for cost overruns. This can be held in cash or savings, stock or investments, gift from family or it can potentially be financed. If averages do not occur, no cash has to be spent. We do have both credit and debt to income ratio standards.
Closing on a Farm Credit Construction Loan
When building on large acreage, we can account for the true value of the full acreage. Not all lenders value every acre. Land is our specialty, so we can count the value of every acre (larger acreage means more value). This will give you more equity in the property and can potentially reduce the amount of cash you need to put in for construction. Additionally, we can roll existing land loans into the construction loan for one loan on a 30-year term. We require interest only payments on funds disbursed during the 12-month construction period, which then rolls into a fully fixed mortgage with fixed payments. Use our loan calculators to calculate your payment here.
Another advantage of working with Farm Credit is that buyers will only pay closing costs when the loan initially closes, meaning there are no closing costs when the loan switches to permanent financing. Farm Credit offers note modifications in place of refinances for rate purposes, lowering interest rates when they come down for a flat fee. These do not require a new title or appraisal, and no additional closing costs outside of the fee. In short, note modifications can save you time and money in the long run, when rates shift in your favor! These can be done an unlimited number of times over the life of the loan and will be advised upon by your Farm Credit lender.
As you can see, there is a lengthy process when it comes to preparing to build and we want to be there for you every step of the way. Get connected with a lender today to see how we can help you get into your dream home!