New construction can be a great option when you’re buying a home. And if you’re purchasing a home that a builder is financing, you can usually purchase it using any kind of traditional financing that you want - Conventional, VA, or even Jumbo.
However, sometimes the right answer is to build a custom home because it gives them the freedom to create their dream residence and have exactly what they want.
When you choose the custom home route, there is a special type of financing that is needed called a construction perm.
A construction perm is a hybrid mortgage. Meaning, it’s a mortgage that is set up in two separate phases.
In the first phase, the loan operates as a line of credit where the bank lends you the full loan amount in a line of credit that the builder will draw against as the house is being constructed. The second phase is where it will transition to a more traditional or conventional mortgage product like a 30 or 15 year fixed mortgage.
An important part of the process to keep in mind with construction perms is that both the builder and the borrower need to be approved. Most banks that offer construction perms will vet a builder before moving forward with an approval process.
Let’s review what this process will look like.
When you’re building a home, you’re not paying the full price from the get-go. You’re actually paying on it as it progresses.
Let’s say you’re buying a million-dollar home. And you’re putting down $200,000 and borrowing $800,000 towards the final project cost.
When you are approved for that loan, lenders will process it, underwrite it, and approve it before construction can start. After that, the builder can begin constructing the home and drawing against the $800,000 line of credit that is approved and closed on for the borrower’s sake.
The first draw of $100,000 is effectively going to be your first mortgage. You’re going to get a bill for $100,000 and you’re only going to pay interest on that $100,000 - the money that has been dispersed to the builder. As the home progresses towards completion additional draws will be taken and payments increase accordingly.
As far as down payments, credit scores, reserves, and more - the minimum requirement for credit scores to be approved for a construction perm is typically 700. And the lender will typically request 6-12 months of PITI reserves on the final loan amount.
A big misconception on construction perms is that they are complicated. It is simply a home equity line of credit that butts up against a permanent, traditional mortgage. If you’re working with the right person, it should be a straightforward and easy process.
If you’re interested in construction perms, it’s important to work with a specialist in the field. This is because they have backend systems already in place to handle the construction servicing piece as far as requesting and disbursing draws, wiring into accounts, etc.
While this isn’t a loan type I offer, I’m happy to provide a recommendation in your area.
If you have any additional questions about starting your home buying process, you can contact me by emailing rebecca.richardson@wyndhamcapital.com or finding me on Instagram (@the.mortgage.mentor).