Just hearing this phrase makes me want to curl up on the couch with a blanket and enjoy some cornfield baseball, but that is not what we are going to talk about here. It seems everywhere I turn in our wonderful town, there are new houses breaking ground or beautiful land just waiting for someone to build their dream home on it. In fact, according to the National Association of Home Builders (NAHB), new home construction is in its 3rd month of record highs, yet new housing starts are still sitting a whopping 6% below demand for purchasing nationwide. With many homebuyers in competitive bidding wars, multiple offer situations and lack of inventory across the county, many homebuyers I talk to right now are evaluating the option building their own home… they just don't know where to start. Then of course there is the buzz of excitement around our newest housing development, Sage Ranch, that will be breaking ground and bringing highly anticipated new neighborhood amenities to Tehachapi. So, what are the differences between new construction options and how does someone even go about navigating lending for new construction? Glad you asked- my husband first began building houses back in the early 2000's and as a result of that and me being a Mortgage Advisor offering construction loan options and working with contractors and new build buyers… I have learned a think or two.Verify my mortgage eligibility (Feb 29th, 2024)
Let's start with new Residential Developments- this would be your larger scale tract home type of development where the builders/developers create a complete neighborhood plan and build several different home plans in a predetermined area. Think… Sage Ranch. Generally speaking, this is the most common and easiest way to buy a newly constructed home. Sometimes they come with amenities such as a pool, park, or community recreation building, sometimes they are just houses complete with sidewalks, streetlamps, and mailbox after mailbox… you get the idea. Generally there are model homes for you to walk through and get an idea for what your options are as you chose your lot within the development, floor plan, upgrades, etc. They generally have a sales agent, realtor and lender available to help you, but it is important to know that you can always use your preferred Realtor and your own Mortgage Advisor to help you purchase in a development. Don't assume you have to use theirs, or that it is your best option even though there are generally incentives given for using their team. Any smart home buyer will explore options and compare what is truly best for you. Pro-Tip…it's not all in the numbers.
Next up there are spec homes, or semi-custom- these are new homes built by contractors, or owner builders and financed by them using their own resources. Owner builders are not typically licensed contractors but own the land and are an active part of the building process and financing. These homes are designed, planned and sometimes even fully constructed without the buyers input and design. They are built based on demand, or current design with any buyer in mind. The financing side it is like buying a house already done, but if you contract to purchase it early enough in the process, sometimes you can make some design choices that are your preference… leading to the semi-custom feel of your new home. We see a lot of this type of construction in Tehachapi. Know that for these semi-custom homes, you can also use your own preferred Realtor and Mortgage Advisor.
Last one I am going to cover is custom homes. Custom home construction is the one that can be most confusing and sometimes challenging if the Contractor does not have a financing source or requires that you obtain your own financing. Some contractors can finance your custom home and will only require a substantial down payment. This will vary by contractor, but I most often hear the down payment is equal to the percentage down of your financing, or around $25,000. Again, this will vary by contractor and project. You are heavily involved in the design process and choosing the features your home will have. It is likely that you even chose your lot from active real estate listing, or contractor owned lots. When you need to obtain personally financed construction, that is where it can get most confusing for home buyers. Let us address that in the next article and as always, the best way to explore your options is to connect with a local mortgage professional who can evaluate your specific situation. The next few months can be a great opportunity to be working on the details just in time to break ground in the spring!Verify my mortgage eligibility (Feb 29th, 2024)
If your build it, they will come… continued!
If you happened to dive into my previous article, we were discussing new housing construction. With the current lack of inventory in the housing market, which the National Association of Realtors (NAR) projects will continue well into 2021 and we will see approximately a 3% appreciation in housing values in 2021. Active listings are down nationwide over 38% adding to a continued shortage of homes to meet demand. Anyone who has been though Economic 101 would understand the supply an demand effect here.
Anyway, feel free to refer back to the previous article to learn about a few different types of new construction while we move on here to financing. When you want to build a new home and the builder cannot finance it for you, you have a few options. Just note going in, if you are not building with your own cash, it is likely to cost you more to finance your dream home. Here are a few types of financing:
Hard Money- google hard money lending and you will get everything from "hard money is for suckers" to "pro-flipping tips"… this should give you the idea of typically who would want, or use hard money. This is a common form of financing used by people building or flipping when the timeframe is going to be short and the debt paid off quickly. Ask any contractor around here and you will likely find out that your new custom home is at least 8-12 months away form move in ready. Especially right now with our current pandemic situation and extended times in county plan check and field inspections. Hard money interest rates are likely the highest and therefor, you don't want to have that debt sitting out there for long. However, it can be the quickest and easiest way with the least restrictions making it an option worth considering.
Crowd Funding and private investors- crowdfunding is gaining popularity amongst investors and those seeking money to build projects. Private investors and crowd funders are typically people who don't have enough cash to fund and entire project, or just don't want to put all their eggs in one basket so the risk of loss is reduced. There are companies who specialize in crowd funding who evaluate your project and present it to a pool of people, or make it available in their portfolio so people can review and decide if and how much money they want to invest. It can often take longer to fund your project because you have to wait until you have enough individual investors, but with the average Joe able to throw his $1,000 savings towards your project and this source of investing being wildly popular with millennials focused on passive income streams, you might just be breaking ground before you know it!
One-time close Construction loans and Construction loans. I put these together because there is really only two main differences and the rest of the process is practically the same. This is the more traditional way to finance a custom home. You begin the pre-approval process just like you would if you were purchasing an existing home. Talk to a local mortgage professional about your current purchase ability and discuss your final mortgage qualifying factors. All of the clients I have worked with who have had a home built or are currently walk through a complete pre-approval process as if they were buying and moving today… because really, they are. They are signing a contract to purchase, but instead of a 30-day escrow it is months from closing. A complete pre-approval will not only give you a clear idea of what you can afford, it will give your builder confidence in your ability to finalize the purchase as long as nothing in your situation changes during the course of construction.
Which leads me to a big difference between a standard construction loan and a single-close. With a standard construction loan, you are first getting a loan to fund the construction and building of the home. Once the home is complete, you will repeat the loan process to obtain your permanent mortgage. With a single-close, you are doing both at once and as soon as construction is complete, your loan is rolled into your permanent mortgage. At first glance it may seem like a single close is a no brainer, but it truly depends on your specific situation as there are definitely pros and cons to both.
I suggest that you meet with a local mortgage professional who has both options available to you and can help you navigate which choice will be the best for you. If a lender only has one option available, then likely they will tell you that is the best one for you and that may not be the case. Quick ending note, you can often still use your favorite realtor to help look out for you even with new construction, so don't hesitate to ask. The next few months can be the perfect opportunity for research and planning just in time to break ground in the spring!