Q. What are my options for buying the land or lot?

A. Lot loans are available from numerous local and national lenders and generally require a down payment, have shorter terms than other mortgages, payments based on a specific length of time, and minimal closing costs.
Using cash savings to purchase the land is usually the simplest and most economical option, with lower closing costs and savings on interest payments.

Financing the lot with a home equity loan against your current home may allow you to borrow the full purchase price at an interest rate lower than a lot loan with very few closing costs.

The seller may be willing to provide financing in the form of a one-year land contract. Terms typically include a 20% down payment, monthly principal and interest payments, and a balloon payment at the end of the term.
One final option is for the builder to purchase the land and fold the cost into the overall price of the home that they build for you. The builder will require a down payment.

Q. Can I buy the land now and build later?

A. Yes. For many families, buying the land first, then taking the steps to prepare their existing home for sale, and then finalizing the building plans at a more leisurely pace is a desirable and less stressful option. Depending on the subdivision, some have restrictions on when construction must begin after the sale of the lot, generally within one to three years.

After the start of construction, you usually have up to a year to complete the house. When you close on the purchase of the land, you will take title to the property. When you are ready to proceed with building, you may use this equity in the land as a down payment on the construction loan.

Q. What is a construction loan and do I need one?

A. A construction loan is a short-term loan that is taken to pay the builder, suppliers, and subcontractors as the home is being built. Some builders have a line of credit at their own bank to use for the construction loan. However, most home builders require you to get the construction loan along with the final mortgage. The length of time for the loan is usually six months to one year and it generally requires a down payment.
The first step in obtaining a construction loan is getting pre-approved by a lender. Pre-approval requires you to provide your tax returns, bank statements, paycheck stubs, and credit report fee to the lender. The written pre-approval is then given to your builder to take to his bank to initiate the construction loan, or to your lender to give you both the construction loan and final mortgage. Then, a property appraisal is completed using the blueprints and specification sheet to make sure the new home is worth what you are paying for it, even before you build. As the home is being built, the original property appraiser makes inspections to determine the amount of work completed and to make sure that the home is being built according to the original specifications.

Q. What is a “draw” and how does it work?

A. “Draws” are payments from the construction loan to fund the building process. The typical draw schedule is as follows:
1st Draw ? The foundation of the home is completed.
2nd Draw ? The home is framed and roofing has been completed.
3rd Draw ? The “rough-in” plumbing, heating and electric are installed.
4th Draw ? The home has drywall and outside siding.
5th Draw ? The kitchen and bathroom cabinets and trim work are done.
Last Draw ? The home is completed and in move-in condition; usually at closing.

Q. What about the interest on the construction loan?

A. Regardless of who obtains the construction loan, construction interest is due. Construction interest is set up as a simple interest rate loan and is based on the dollar amount of the draw, the rate, and the number of days you use the money. Depending on the lender and the builder, the interest can be added to the contract and financed as part of the final mortgage, paid monthly as the home is being built, or it can be paid in one lump sum at the final closing.

Q. What if I have an existing home I need to sell?

A. Depending on your personal situation, there are financing options available such as “bridge loans” and “blanket mortgages” which allow you to proceed with buying the land and beginning the construction of your new home, while still living in your current home. If you are able to qualify for the financing and feel confident that your home will sell in a timely manner, this option gives you time to market your home and coordinate closings so you only have to make one move.

Q. What is a “construction/perm” loan?

A. Some lenders offer a combination construction and permanent end loan that allows you to secure the construction loan and your final mortgage as a package with a one-time close. A down payment is required and the construction phase proceeds as normal. Advantages may include more favorable rates on the construction phase, a lock or cap on the permanent loan rate, and lower closing costs.

Q. What type of financing do I need to purchase a builder spec home?

A. Whether the home is completed or still under construction, you need to apply and qualify for a mortgage loan just as if you were purchasing a pre-owned home. You need an end loan or mortgage, not a construction loan. There are different types of mortgages, with either fixed or variable rates and a wide variety of terms. A mortgage professional can give you guidance in determining what best suits your needs. You will enter into a contract to purchase the home from the builder, make an earnest deposit, and show evidence of lender pre-approval. If the home is in the early stages of construction, you may be able to choose colors and fixtures to customize your new home. You and the builder will agree in the contract to a date when the house will be completed and ready for your possession.

Q. Who can I count on to help me through this process of building or buying a new home?

A. At the earliest stage possible, consult your real estate professional for assistance. At IRISH REALTY, the New Home Sales Team has the knowledge and experience to make it easier for you from start to finish!