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Buying your first home is an exciting milestone in life. There’s nothing quite like having a space to call your own. For many first time homebuyers, going the route of new construction is appealing. You get to work with a builder to create your dream home from the ground up. However, financing new construction as a first timer does have some key differences from financing a resale home. Here’s what you need to know about getting a new construction loan as a first time homebuyer.
New Construction Loans 101
New construction loans, also known as construction loans, allow you to finance the building of a new home. The loan covers the cost of the land as well as the construction. It is a short term loan usually 6-12 months that converts to a permanent mortgage once construction is complete.
Construction loans typically have variable interest rates that fluctuate with the prime rate. Down payments on new construction loans tend to be higher than resale loans, often 10-20% of the total cost. This helps offset the increased risk to the lender of financing construction
Many lenders offer “construction-to-permanent” loans that let you lock in your permanent mortgage rate upfront. This avoids having to get a new mortgage after construction. One potential downside is that any cost overruns during construction may be harder to roll into the permanent loan.
New Construction Loan Process
The process of getting approved for and closing on a new construction loan has a few additional steps compared to a purchase loan. Here are some key things first time homebuyers should know:
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More documentation required – On top of the typical income and credit info, you’ll also need to provide the lender with architectural plans, construction budget/schedule, builder’s credentials, permits, etc.
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Builder approval – The lender will vet and approve your chosen builder. They want to ensure the builder is qualified and financially stable.
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Draws and inspections – The builder submits periodic draw requests as they hit construction milestones. Funds are released after inspection to verify work completion.
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Longer timeline – Budget 45-60 days for loan approval and closing. The appraisal and permitting processes tend to take longer.
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Construction delays – Bad weather or other delays can happen. Be prepared with a financial buffer in case the builder needs extensions.
Tips for First Time Homebuyers
If you’re a first timer hoping to build new, keep these tips in mind:
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Get pre-approved – Having a pre-approval letter from a lender shows you’re serious. Pre-approval can also help you determine budget.
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Watch your credit – Maintain excellent credit leading up to and during construction. One slip could impact loan eligibility.
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Research builders – Vet potential builders thoroughly. Look for experience with first timers and good reviews. Avoid acting as your own GC.
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Have contingencies – Build in financial wiggle room for unexpected delays or overages during construction.
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Start mortgage planning early – Around 45-60 days before construction completion, start applying for your permanent mortgage.
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Read all documents – Don’t gloss over anything at closing. Construction contracts have unique clauses you need to understand.
Pros of New Construction for First Timers
Though it requires extra diligence, there are quite a few appealing upsides to new construction for rookies:
- Create your ideal home from the ground up
- Everything brand new – no outdated features or repairs needed
- Customize to your lifestyle needs and tastes
- Energy efficient, meeting latest building codes
- Warranties cover defects for 1+ year after completion
- Neighborhood may have other new builds and younger families
For many, the ability to build their dream home from scratch makes tackling the new construction loan process well worth it. As long as you understand the requirements and plan ahead, you can make building your first home a reality. The end result is a customized abode you won’t outgrow for years.
Frequency of Entities:
first time home buyer: 5
new construction: 5
new construction loan: 5
construction loan: 4
first time homebuyers: 3
builder: 3
permanent mortgage: 2
resale home: 1
construction-to-permanent loan: 1
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- An FHA construction loan is a type of FHA loan that covers the cost of building a home, including the land or lot purchase, building materials and labor.
- There are two types of FHA construction loans: an FHA construction-to-permanent loan and a FHA 203(k) loan.
- FHA construction loans can be rolled into an FHA permanent mortgage.
If you’d rather build a home than buy one, an FHA construction loan could help pay for the project. Like a regular FHA loan, this type of financing is insured by the Federal Housing Administration (FHA) and offered by FHA-approved mortgage lenders. Here’s how to get one.
Construction Loans for First Time Home Buyers
FAQ
Can an FHA loan be used to build a house?
What is the minimum FICO score for a construction loan?
What is the difference between a mortgage and a new construction loan?
What is the FHA loan limit for 2024?