If you plan to buy a newly built house, you need new construction home financing in South Jersey. The financing needs to be the next step because it will determine just about everything else about the construction of the home. Your financing provides you the money needed to purchase the land and pay for all of the materials and labor required for the construction process.
Because it is new construction, you will not have to worry about normal issues that resale home buyers do such as an old roof, cracks in the walls or foundation, outdated appliances, or major household systems (plumbing, HVAC, electrical) needing to be replaced or updated. New construction eliminates all these concerns.
At Your Home Sold Guaranteed Realty - Nancy Kowalik Group, our real estate team is well-versed in all aspects of the process when it comes to building as well as new construction home financing in South Jersey. We are happy to assist you throughout the entire process because our goal is to guarantee you have the best possible home construction experience. When you are ready to begin, make sure you enlist the help of our skilled and knowledgeable realtors.
Everything You Need to Know about New Construction Home Financing in South Jersey
As with most other home sales, you will need to secure a construction loan (unless you are paying cash for everything). However, it is important to note that new construction home financing in South Jersey will likely be more complicated than a traditional mortgage loan because there are so many more factors to consider. That is why it is important to have an experienced realtor at your side to assist you.
Get a Construction Loan
A construction loan is essentially short-term financing (usually 12-18 months) which allows you to cover the costs you will encounter during the construction process. Many times, though, the loan will convert to a permanent mortgage at the conclusion of the construction process, so you need not worry about paying it off within that short time frame. If it does not convert, you can apply for a mortgage loan (or end loan) to pay off the construction loan.
Some of the things that a construction loan can cover include:
- Buying the land
- Drafting plans for the house
- Applying for permits
- Purchasing materials
- Paying for labor from the construction team
- Making up for access expenses that were unexpected
You can think of a construction loan as a line of credit which extends throughout the construction process because you will not get the entire sum at once. The lender will send payments to your builder in installments as you progress through the construction stages. To ensure that stages have been completed properly, the lender may send out an inspector to evaluate the progress according to your timeline.
Because construction loans are not secured to an already existing home (as mortgage loans are), the application and approval processes for these loans is more complicated. A lender will need to see architectural plans, thoroughly examine your financial situation, and be given a clear and comprehensive timeline and budget for the project before giving you any sort of approval.
Types of Construction Loans
There are two basic types of construction loans that are available to most home buyers, and two more are kept in reserve for certain circumstances. These types of loans are:
This is the type of construction loan mentioned above. Once the home has been completed, your construction loan will convert into a fixed-rate mortgage loan. This is ideal for those who want to save on closing costs and have a consistent mortgage financing rate.
This is a short-term, adjustable rate loan which must be paid off at the conclusion of the building process or refinanced into a mortgage loan. If a home buyer has a great deal of cash or money available from the sale of their previous home, they may be interested in this type of new construction home financing in South Jersey.
Owner-builder loan: If you are building your own home rather than relying on a third-party contractor, you can have the draws paid directly to you from the lender. You must, though, demonstrate that you have experience as a home builder or are a licensed contractor.
If you are investing in a fixer-upper home and will be doing extensive renovations, this may be the loan for you. It will cover the cost of the home itself as well as the renovations. The amount will actually be based on the potential value of the home following renovations.
If you want more information on any of these options or help deciding which one is right for you, be sure to rely on the expertise of a skilled realtor such as ours at Your Home Sold Guaranteed Realty - Nancy Kowalik Group.
How to Get a Construction Loan
If building your own home sounds like a great option for you, then you will need to understand the ins and outs of actually securing a construction loan. Before you get any money for your project, you need to get approval from the lender. It is essential to remember that securing this type of loan will be more difficult than a typical mortgage because there will be no collateral for the loan. The standards by which you will be judged for the loan will be very high.
In order to secure the loan, here are some of the most essential factors you must have:
Exceptional credit score
A bare minimum credit score is about 680 to qualify for a construction loan, but many lenders will actually require a higher score of at least 720 to even be considered. If you don’t meet this minimum, take some time to improve your credit score.
Sufficient income: While a great credit score is helpful, it is not enough to give a lender confidence that you will be able to meet the monthly payment requirements. You will have to show confirmation of your annual income that shows you can afford to take out this type of loan.
Low debt-to-income (DTI) ratio
Your DTI ratio compares all of your monthly debt payments to your income each month. You must have enough money to pay your current debts as well as the loan payment, and the lower your DTI, the easier it will be to actually secure the loan. 45% is usually the maximum DTI ratio that will even be considered, but lowering that percentage is highly recommended.
20% down payment
At a minimum, most lenders will require a down payment of at least 20%, but many lenders will actually require between 25% and 30% of the total construction costs. Anything under 20% will probably require private mortgage insurance (PMI).
Budget approval for the project
A new home construction project is full of uncertainties, so lenders will require a great deal of details about the project. We recommend that you provide them as much information as possible, including a deed/purchase offer for the land on which you will be building, blueprints and specifications of the construction, line-item budget in their preferred format, payment schedule, and a signed construction contract with provisions for change order.
Your lender will also need to approve the contractor you will be using, so you must demonstrate that the builder is licensed, insured, and qualified. We recommend that you offer the lender copies of the builder’s insurance certificates, resume, proof of financial stability, and a description of any other party who will be a part of the project including architects, general contractors, and others. Your contractor should be prepared to offer you this information anyway.
Once you have everything you need to take to a lender, it is time to find one!
Find the Right Construction Loan Lender
In a similar fashion to choosing your builder, you should take time to decide which lender to use. It is not advisable to simply pick the first one you find. It is important that you choose one which has extensive experience and suits your needs and personality.
Be sure to find out information such as the types of construction loans they offer, their interest rates (fixed or variable), closing costs and other fees, down payment amounts, construction draw schedules, how to pay for materials, and how unexpected problems are handled.
The information they give you in response to these points should prove very helpful when it comes to making the right decision as to which lender you will work with throughout the project.
Our Realtors Guide You Through the Process for New Construction Home Financing in South Jersey
Are you excited about the prospect of building your own house? There are many factors to consider throughout the process, including how to get through new construction home financing in South Jersey, and our team at Your Home Sold Guaranteed Realty - Nancy Kowalik Group is here to help guide you through the entire process from start to finish.
Our realtors know the ins and outs of the new home construction process, and we are happy to share all of the information, resources, tools, and guidance we have with you to ensure that you make the most well-informed decisions at each stage. If you are ready to get started or simply want to get as many details as possible, give us a call at (856) 478-6562 or fill out the form on this page with the requested information. One of our skilled realtors will send you a detailed response as soon as possible.
We look forward to hearing from you and helping you to understand new construction home financing in South Jersey!