Three years ago my wife and I sold our dream home that we had built out in the country to move back into the city to raise our three kids. Having been a Realtor for four years, I had helped several people through the purchase process but you get a unique perspective when it is your family you are serving.
After four months of searching, visiting over 50 houses and cringing every time my wife would say “Let me show you a house I found today” we finally found the house that both fit our needs and was within our budget.
Many buyers are finding themselves in the same situation today. With an improving Louisville housing market, inventories are low and many properties are receiving multiple offers causing buyers to be frustrated.
This leads to many questions including:
“Why don’t we just build what we want?”
which in turns leads to:
“How much does a new house cost?” and “How does the mortgage process work on a new home?”
There are multiple ways in which the financing of a new house can be completed but there are two that are most commonly used.
2 Ways to Finance Louisville New Construction Homes
Before we look at these financing options, one big question has to be asked.
“Who owns the land on which the house is going to be built?”
The answer to this question will largely determine which financing option you use.
Builder Owns the Land
Many subdivisions today have one or more builders who own lots in that neighborhood. When you are in discussions with one of these builders the price of the house includes not only the house but the land that the house is going to be built on, as well.
Normally when the building lot is owned by the builder they will require a pre-approval letter from your lender and a 5-20% non refundable down payment. In return, the builder will secure funds from a bank called a construction loan in their name to finance the building of your house.
As construction progresses your lender works to finalize your permanent financing for your new home. When construction is complete and you’re ready to close and move in, your lender will have your final papers to sign and the closing is very similar to any purchase closing. Your deposit is applied to the purchase price and your lender secures the funds necessary for the balance.
Pros: One closing. Builder pays all bills and handles all construction related costs.
Cons: You don’t own the property that the house is being constructed on. Make sure you have a rock solid contract and you choose an experienced, reputable builder you can trust to build your house to the specs that are agreed upon. If you don’t know any builders, ask your Realtor who they recommend.
You Own the Land
In some cases, a person may choose to buy some Louisville property, and plan to wait and build months or even years in the future. When the builder does not own the lot there are two different financing options that can be used.
The owner of the property would take out a construction loan and pay the builder a flat fee or a percentage to build the house. As the building process progresses, the bank will give the owner draws from a construction loan to pay for the construction that has been completed. After the house is complete the owner will then get permanent financing with their lender.
The owner of the property would take out a construction loan and turn that account over to the builder to manage. As the building process progresses the builder draws funds from your construction loan to pay for the construction as you go. Once the house is complete, the owner will then get permanent financing with their lender just like before.
Pros: Owner has more control over the process. Note: This may not be a “pro” if you do not have time to help manage a project.
Cons: In most cases you may have a separate closing for the construction loan and permanent financing. You will have to be more involved in the process of paying subcontractors. Budget overruns could jeopardize the end result if the builder cannot finish the project with the remaining funds available. Be careful to watch the budget and disbursements carefully, as errors might crop up.
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