Financing The New Home Construction Of Your Dreams
Introduction
Suppose you're looking to build a new home in Richmond, VA, or the surrounding areas. Maybe you have researched how to choose the right custom home builder or the cost of building a home in Virginia. But, if you have yet to look into financing the construction of a new home, this article is for you. We’re sure you have tons of questions about financing the construction of your next home. For example, what people need financing for new home construction? What kinds of construction loans are available? Which are the best in Virginia? If you’re ready to learn about it, let’s get into it.
Who Would Need New Home Construction Loan
This might sound obvious to answer, but it goes deeper than “anyone who wants to build a house.”
Many couples and families shop around and they are all looking for the same things. Think about the questions you ask yourself.
Is this home big enough for my future family?
How energy efficient is the house and will it save me money on energy bills?
Are schools in the area high-quality?
Is the distance to shopping centers and other amenities too far?
Can I customize this house in the future as my family grows?
Does this house have the unique features that will make it my personal dream home?
If you read those thoughts and said “Hey, I’ve considered those things.” Then now it’s time to consider the time and challenge it can be to shop for existing homes that meet all your requirements.
Tons of people have come to us and wanted to build their own brand-new, custom home. But, there are some traits they all share and that helps us answer the question, “Who would need a new home construction loan.”
If you’re looking to move into a new home and you have the time to wait for construction to be completed.
You have shopped and shopped and can NOT find a home that matches all your desires.
You keep finding homes that suit ALMOST all your needs but they are missing something.
Every time you find the perfect home it’s too far from the required amenities or in the wrong school system.
In a nutshell, you just can’t seem to find the perfect mix of features, location, and amenities that make you say “This is it, I want to live here forever!”
If that sounds like you then a custom home that has the distinct features you pick out, the design you help create, built on a lot of your choosing, and in the location you want, is right for you.
To get the construction started, you will need a New Home Construction Loan.
What Is A New Construction Loan And How Do I Get One?
What Are New Construction Loans?
A construction loan is a short-term loan that will cover the cost of building your custom home. This includes the land, labor, materials, and permits.
The approval process is similar to obtaining a mortgage because you will need to apply and submit documents to the lender (see more later in this section).
Be aware they are different from mortgages because mortgages require collateral (the home), and are special financing for constructing the residence.
These loans usually require you to work with a licensed and insured home construction contractor and you have to submit plans before the loan is approved.
Unless you’re a professional contractor then check out our article on “How to Choose the Right Custom Home Builder in Virginia.”
The loan is paid out to the contractor in stages as your construction crew is building your home.
Once construction is complete you will be issued a certificate of occupancy. Then, your construction loan is usually converted to a traditional mortgage, and you will begin to make payments on the principal and interest.
Now you know what construction loans are, but how do you get one?
How Do I Get A Construction Loan In Virginia?
A construction loan for a new home isn’t hard to obtain but has some requirements. But, before you start looking for a lender you will want to complete a few steps.
We compiled this list to make it easy for you:
Find a licensed and insured home builder in Virginia.
Familiarize yourself with your current debt-to-income ratio. This link will take you to a page that will help you figure out your debt-to-income ratio.
The home builder will ask you questions and assist you with developing plans for your custom home.
Have an appraisal completed to determine the value of the home based on the plans.
Obtain any other documentation a lender will require.
Prepare a realistic budget that outlines the costs associated with the project.
Some requirements for a construction loan:
Credit Score: Most lenders in Virginia will require a minimum credit score of 620 or higher for you to qualify for the loan.
Debt-To-Income (DTI) Ratio: The lender you meet with will look at your DTI ratio. This compares your recurring monthly debts with your gross monthly income.
Down Payment: This will vary based on the lender, but expect a 20% down payment. Much like you would have to with any mortgage.
Builder Choice: You will want to have this figured out because the lender will have to review their licensing and insurance.
Plans: You and your builder will need to have the plans and appraisal drawn up before the lender will approve it.
The Different Types Of Construction Loans
Now that we have discussed who would need a construction loan and how to get one, it’s time to talk about the different types of construction loans available for Virginia residents.
Types of House Building Loans
Construction-Only Loan: A construction-only loan is a short-term loan that is issued for a year. They are meant to ONLY cover the construction period. A lot of lenders don’t offer this loan because there are so many variables involved. They are considered high-risk loans because they require the builder’s cooperation and getting approval from the localities. The loans are harder to qualify for and usually have higher interest rates. If you decide to apply for one of these loans, you will have to pay loan fees again when you apply for a traditional mortgage.
Construction-To-Permanent Loan: Construction-to-permanent loans are a great option for prospective custom home builders to apply for. These loans are just like construction-only loans because they fund construction and can then be converted into a traditional mortgage. However, you will not have to reapply for the mortgage. One of the differences is during construction, the borrower will make interest-only payments.
Be aware that if you’re an active duty service member or veteran, you may qualify for a VA construction loan from the Department of Veteran Affairs (VA).
Renovation Loan: Renovation loans are also known as FHA 203(k) loans, and they are used for renovating your current home. The loans are insured by the Federal Housing Administration (FHA), and they let you borrow the funds to purchase and renovate a new home while still making one monthly payment to cover both costs.
Owner-Builder Loan: If you’re looking to build a home, more than likely you will have contacted a home construction contractor. This contractor manages the entire project and ensures their crew, or subcontractors hired to complete framing, tile, wood, and roofing, all work in coordination to complete your custom home.
This loan is for you if you want to act as your own new home construction contractor. But, you will need to demonstrate to the lender your experience, qualifications, and licensing to be sure you can oversee your home’s construction.
New Home Construction Lender Information
There are many lenders in Virginia that provide new construction loans. But, which one is the best to go with? Birchwood Homes has researched different lenders and has one that is highly recommended.
Sparrow Home Loans
Sparrow Home Loans is a new home lender that specifically works as a team with local businesses. You can view information on their website: https://brianalsparrow.wixsite.com/sparrowhomeloans
This lender has helped over 100 families purchase or build their new homes each year since 2018. As a locally owned company, they have a lot of pride in helping residents moving to Richmond and around the surrounding counties.
New Home Construction Loans And Financing FAQs: Frequently Asked Questions:
If you don't see the answer to your question, don't hesitate to contact Birchwood Homes.
What is the minimum credit score to get a new home construction loan in Virginia?
Many lenders will require a credit score of 620 or above, but this can vary on a number of factors. The lender will look at your DTI (Debt-to-income) ratio, and make a decision based on those numbers together.
What are the differences of a new construction loan?
New construction loans often require payments to begin when the funds have been distributed to the builder. The parameters of this are different based on the loan.
What are the benefits of a VA new construction loan?
The biggest benefit of a VA construction loan is no down payment. That means veterans can avoid the time it takes to save up a large lump sum for a down payment.
How Birchwood Homes Help With Financing Your New Home’s Construction
Birchwood Homes is a new home construction company that specializes in building custom, new homes. We have preset plans that can be optimized to your liking or we can assist you with planning and designing a new home from the ground up. But, the real value is we don’t just assist with the construction process, we help you throughout the entire process, and that includes financing.
Our company will help you choose the right financing and get the best loan. That means when you work with Birchwood Homes, we make it possible to get the home of your dreams.