The thought of building your own custom home can be thrilling – you get to call all of the shots when it comes to the layout of the home, the size and number of the rooms, and even the color scheme and finishes that go into the home’s design. It’s definitely not a one-size-fits-all experience!
How to Get a Mortgage for Your Dream Custom Home
Financing your new dream will also be unique, as getting a standard mortgage loan just won’t do the trick. Although it’s relatively easy for most people that have a reliable income and a good credit score to get a traditional home loan, it’s a different story when it comes to getting a custom home mortgage.
Think about it – you’re essentially asking a lender to give you money for something that doesn’t exist yet. Most of lenders consider new construction financing to be a risky undertaking, and we all know how banks feel about taking risks.
So, how do you go about financing the building of your custom home?
Consider a Construction Loan
Otherwise known as a self-build loan, this type of financing is usually a short-term loan (typically maxing out at one year) that covers the cost of building your new home.
Construction loans have rates that are generally higher than those associated with a standard mortgage loan. And once your custom home is completed, you can turn around and refinance your self-build loan into a permanent mortgage, or take out a new loan (called an “end loan”) to pay off your original construction loan.
Be sure to do your homework and check with your local credit union or regional bank to see what they offer in terms of self-build loans, as most lenders rarely offer new construction loans online.
Lay the Groundwork
As you prepare to apply for your construction loan, make sure that you have all of the necessary paperwork to prove to the lender that your custom home project is legit. This includes proof of a realistic construction timetable and a reasonable budget.
You’ll also need to show the bank that you have a comprehensive outline what it’s going to take to get your new home built, such as an in-depth floorplan and a list of required building materials. Most experienced home building companies will provide you with a “blue book” that goes over all of the home-building details.
Also be prepared for putting down a sizeable down payment for your self-build loan. Most lenders require a minimum of 20% down on a construction loan, to make sure that you don’t simply walk away from the project that they are financing. You should also try to pay for the lot your dream home will be built on upfront, so it won’t be needed to be included in the self-build loan and require an even larger down payment.
Work with an Experience Builder
Most lenders will also require proof that you are working with a custom home building that has the necessary experience to get your project completed and a stellar reputation as a licensed contractor.
If you plan to work as your own general contractor for your new home building project, most banks will turn you down for a construction loan. They want to make sure that your project is backed by a knowledgeable professional that will get your custom home built right, the first time around.
The Bottom Line
Building your dream home can be one of the most rewarding experiences that you’ve ever had, and although getting financing may not seem like a walk in the park, now that you have an idea of how to get a custom home mortgage, you can start focusing on turning your dream into a reality.