Financing your custom home.
Building a new home can be a daunting task. Choosing a builder, lot, architect, as well as making the choices of materials, colors, and design can take well over a year. This process, ripe with financial peril, will also be the biggest purchase of your life.
Finding the right lender to finance your project is foundational to financial stability throughout the project. Finding a lender that has your back can save you time, money, and even save you from common financial errors while building your home.
Things to consider when choosing a lender.
Interest Reserve: Does your lender have a line item for interest reserve? If not how will you pay the interest on your loan monthly? Depending on the amount and duration of your build you can pay between $5,000 and $20,000 in interest during construction. As a builder, I saw the stress a monthly interest payment made on owners during the construction of their dream home. Often times this interest payment was a surprise and ruined the process for that client. Make sure you are prepared for those costs and preferably that they are built into the loan.
Fees: Fees on new construction loans are more expensive than mortgages because the lender takes on more risk. Much can happen during the build including market swings, cost overruns, and life events to the borrower. Ask your lender what fees they charge. If you are in a competitive market it is probable that the fees are pretty similar between lenders. Some typical fees are
- Title insurance
- Closing costs
Sometimes there are unique fees for items that may help you during the build of your new home and will be well worth the extra cost. If your lender is tech savvy they may have tools that help you with your build and save you heartache, stress, and money.
Change Orders: Often during your new home build you may want to add or change something. How does that affect your loan? Make sure you are aware of what a lender wants from you if a change is made. Sometimes a lender is lenient with the “Contingency” line and will let you pull from that category. Other times the lender requires a cash infusion. Understanding your lender’s requirements here will help you as you make decisions with your contractor.
Payment Process: As a builder of over 10 years and now a provider of software to lenders I have seen the chaos, pain, and error behind making payments correctly. Often times invoices are accidently paid twice, or missed entirely until a lien is filed. Projects can slow or even stall if payments to subs are not being made in a timely manner. Ask your lender about the process they use, what your involvement is, and how they track budgets over time. If it is in excel be aware that excel cannot create a living breathing document that shows costs and payments over time. Also, be aware that the lender, the builder, and you (if you are tracking costs) will have different sheets that don’t match. That is a recipe for disaster at the end of the job when it comes time for reconciliation.
You want your house to be built right, within budget, and on time. Finding the right lender with the right tools will make a difference in all 3 of those metrics and set you up for financial success on your new home.