We all have a different idea of what a dream home would be. Some are able to find that home already built, others want something a little more customized. That’s where the option of building your own home comes in! In most cases you can’t do that without a construction loan, which is a different process than your normal mortgage loan. To help you learn more about construction loans, I interviewed the Director of Mortgages at First Alliance Credit Union, Jennifer Busch.
Jennifer has been in mortgage and real estate lending for over 16 years. She says her favorite part of working with members to help them build their dream home is being able to see a family’s dream come true of building their own home.
“It’s fun for me to hear about the items they are picking out, and how their vision is becoming a reality. When I get to see the new build in person when it’s done, that’s especially rewarding.” – Jenn Busch, Director of Mortgages
Question 1: If someone has decide they would like to build their next home, what is the very first step they need to take to get the process going?
Jennifer's Advice: Start visiting home builders to get an idea of what type of home you want to build. Ask builders to give you rough estimates of what building your home might cost. Also, check around neighborhoods you would want to live in to find land for sale. Once you have a solid idea of how much it will cost to build a home and where you plan to build it, then it’s time to meet with your chosen lender, and apply for a construction loan mortgage.
Question 2: What is the difference between a construction loan and a regular home loan?
Jennifer's said: Both loans are mortgage loans, the term mortgage applies to any loan for real estate. The primary difference in terms of lending is that the term mortgage loan is most often is used in connection with an existing dwelling. A construction loan is made with the expectation that a dwelling will be built on a lot. The construction loan application, in most respects, mirrors the application for a loan on an existing dwelling, with one important exception. Since no house exists at the time of the application, a set of detailed blueprint plans must be provided by the builder to your lender. The loan is based on the appraised value of the building lot, plus the home to be constructed. It will be very important to be detailed in your written descriptions and plans for the new home, because you are painting the visual picture for the appraiser, so that they can see your vision for the completion of the new home.
Question 3: Do you have to own the land outright that you are planning to build a home on?
Jennifer explained: The short answer is yes. The building lot must be titled to you before or at the same time a construction loan can be filed. In most cases a construction loan must be the first and best lien on the property. In some cases, depending on the value of the lot and cost of dwelling being built, you may be able to borrow a portion of the lot cost and include it in the construction loan. However, that should be discussed with your loan officer prior to the applying for your construction loan.
Question 4: Do you need high income and a high credit score to qualify for a construction loan?
Jennifer said: Generally speaking, yes, construction loans are typically for more mature borrowers and do require a higher credit score than other types of mortgages. Income always plays a factor in qualifying for any mortgage, but construction loans often times cost more than buying an identical existing home, so the income requirement does tend to be higher to ensure you can afford to repay the loan.
Final Thoughts about Construction Loans
Jennifer certainly has a wealth of knowledge about building your dream home! The construction loan process can be complex, so it’s important to fully understand it before deciding whether or not to build your next home. If you want to know more about construction loans I encourage you to join me and Jenn on Tuesday, July 10th at 7:00 PM for a Facebook Live Q&A session all about construction loans. You will have a chance to ask questions and get live answers from Jenn! I would also encourage you to download the free, easy to follow Guide to Construction Loans.