Conventional Mortgage vs. Construction Loan Mortgages
Conventional Mortgage
Down payment requirement’s very by the lender. As low as 0% for a VA Loan up to 20% for a conventional mortgage. A few banks offer as low as 10% down with no Private Mortgage Insurance, or 5% down with insurance. Again, these are broad statements so you would have to check with your lender.
Conventional financing, also known as an “end loan”, is where the buyer gives the builder a down payment, usually a minimum of 20% or more of the agreed price, with the remaining 80% paid when the home is completed. Some banks allow a portion of the 20% deposit to be refunded to the buyer at final closing if they want to reduce their loan to a 10% down mortgage. With this type of loan, a builder incurs numerous fees and other costs.
1,) The builder must borrow money to buy the lot and build the home. He must pay high commercial loan rates which maybe 2% or more than what the homeowner would pay for their mortgage
2,) The builder then must pay two attorney fees:
- to purchase the lot from the developer (usually $600 to $700)
- to sell the lot and the home to the buyer at the end (another $600 to $700)
3.) There is a county clerk filing fee of ¾ of a percent of the face value of the builder’s loan. On a $250,000 commercial loan, that is a $1,875 fee! With this conventional style loan, the builder considers these fees and costs to be part of his total cost to build the house. The price quoted for your home will be increased to reflect these extra costs. That is why the builder will ask you about your desired method of financing upfront.
At the final closing, the buyers will have to pay a fee to their attorney also. The real heartbreaker is that the buyers will have to pay the county clerk fee of ¾ of a percent again to file their own mortgage loan.
(We have just heard of a new program in place at some of the lenders that allow you to reduce the amount of your county clerk fees by the amount that the builder paid for his construction loan. I believe that the builder and home buyers both have to do their borrowing through the same lender. Check with your lender.)
Construction Loan Mortgage
A less expensive way to finance is with a construction draw loan. (At Martin Custom Homes, the lot deed stays or closes in the buyer’s name.) The buyers close on their mortgage upfront with as little as 5 to10% down. Some banks will even allow some of the lot cost to be financed. During the build, progress payments are paid to the builder in five (5) installments based on the phase of completion. The phases and approximate dollar %’s for the draws simply put are:
1.) Foundation Complete – 20%
2.) Framing Complete – 30%
3.) Rough mechanicals installed – 20%
4.) Drywall and trim installed – 20%
5.) Certificate of occupancy – 10%
Before money is released, the lender inspects the home to ensure the house is complete enough for the draw, and they also do a lien search to make sure that the builder is paying suppliers. This protects both the buyer and the bank. During construction, the buyer makes monthly interest-only payments to the lender, and only on the actual dollars released to that point. The interest is charged at the low homeowner mortgage rate, not the builder’s expensive commercial rates. There is only one upfront closing, and in most cases, the builder and his attorney are not involved, translating to no attorney fees. The ¾ percent county clerk mortgage filing fee is only paid once. The total savings to the buyer is more than $4,000 – $6,000+. The average buyer can expect to pay about $2,000(+/-) in interest over the course of the build.
If you have cash on hand or a lot of equity in your current home that you want to utilize in your new home, you can take out a home equity line of credit (HELOC) and use that to pay for the draws at the beginning of the build or the whole construction! This can be a big money saver also.
Suppose during construction you sell your current house and want to apply some of those funds to your new home. Not a problem! Give the bank any additional money you want to put down prior to the bank converting the loan to a traditional principal and interest mortgage payment at the home’s completion. This does not require a second closing.
Some banks even allow you to place lump-sum payments (minimum of $10,000) towards your mortgage several years after you have moved in! There is usually a fee in the range of $200 – $300 to accommodate a revised filing with the county clerk. The extra money you put down does not reduce the length of time in the mortgage, it reduces the amount of your monthly payment. This works very well for people who want to stay in their current home during the build. and sell it after moving into the new home. You can see this type of loan for building a new home offers you a lot of flexibility. Call us for more detailed information.