Financing a new construction home

Congratulations! You’ve weighed the pros and cons and decided that you want to build your family’s next home instead of buying one. You’ve even done your homework and found a home builder that you can trust.

Now, all you have to do is pay for it.

That’s easier said than done. According to HomeAdvisor, building a new home in Oregon ranges in cost from $170,000 to $450,000, depending on the building’s size, the cost of building materials, and the price of land.

Fortunately, there are several programs out there to help you foot the bill. There’s also a team of Arbor Builders agents who are experts in the types of financial help available to home builders and will be happy to answer any questions that you might have. Call them today, and get help finding the program that works best for you.

The Basics

One of the first things that you need to know before seeking financial help for home builders is the difference between building a house and buying a house.

People get a key when they buy a house, a key that fits an actual lock on an actual door on a building that is theirs to do with whatever they want. It might need a little bit of work before you can hang your pictures on the walls, but there is a building and it belongs to you.

That building is something that your lender can take if, for whatever reason, you can no longer pay your mortgage. In other words, the loan that you took out to buy the house is secured by the house that you just bought.

Lending institutions don’t get that sense of security when you build a house. When you pay someone to build a house, you are paying for a vision that is the end of a process that can take a year or more to complete. You might have blueprints one month, a concrete slab a month after that, and a wooden frame the month after that. But you don’t have an actual house until the money that you just borrowed has been spent.

Traditional mortgages don’t work in this environment. But there is a financial product that can help you, called a construction loan. It’s important to know how these loans work if you want to know what type of financial help is available to home builders.

Construction loans

Construction loans provide those looking to build their home with the money that they need to buy a piece of land, buy the materials required to build their home, and pay the contractors who design and build the new home. Some construction loans provide home builders with money to buy their appliances, while others offer money to cover the cost of trees, shrubs, and other items used as part of their landscaping scheme.

These loans come in two major categories:

  • Construction-only loans: These loans pay a certain percentage of their balance each time the borrower passes a milestone in the home-building process — completion of the blueprints, completion of the foundation, completion of the frame, etc. The borrower starts paying interest on these disbursements as soon as they happen. They must also pay the loan’s full balance, including interest, when the construction is complete. As you’ve probably guessed, many potential home builders need to take out a second loan, a type of mortgage known as an end loan, to pay their construction-only loan. They have to complete two loan application processes and pay two sets of fees.
  • Construction-to-permanent loans: These financial products start as a construction loan and then transform into a traditional mortgage once the home’s construction is complete. These loans come in both fixed- and adjustable-rate mortgage rate options for a 15- to a 30-year payment period. As a bonus, one loan equals one set of fees.
    Many lenders don’t offer construction loans because of the instrument’s complexity and the level of risk involved. Some lenders have tried offering construction loans to their customers but vowed never to do it again after the first time.

Construction-to-permanent loans also require a 20% down payment, like traditional mortgages. People who cannot afford this may qualify for a lower down payment Federal Housing Administration Construction Loan, one of the many programs that provide financial help for home builders.

Government Assistance

FHA Construction Loans only require a 3.5% down payment from borrowers with a credit score of 580 or higher and a 10% down payment from borrowers who have a credit score between 500 and 579.

Borrowers must maintain a debt-to-income ratio no higher than 43% to qualify for these loans and are bound by a maximum loan limit that varies depending on their county’s average home price. The maximum loan amount available to borrowers in Deschutes County, Oregon, is $431,250, while the cap is $356,362 for borrowers in Crook and Jefferson counties.

The USDA’s Office of Rural Development and the U.S. Department of Veterans Affairs also provide qualified borrowers a chance to get a low or even zero down payment construction loan. The VA takes things one step further with its Specially Adapted Housing grant program that offers disabled veterans up to $100,896 to build an accessible home. The Federal Emergency Management Administration offers a grant program that helps disaster victims build a house if they have no other viable home replacement or repair options. Nonprofit organizations may also offer financial help for home builders. For instance, Energy Trust of Oregon’s Path to Net Zero program offers people interested in installing solar panels on their new home up to $6,000 to cover the project’s early design costs.

It can be hard to keep track of all the government agencies and nonprofit organizations that offer financial help for home builders. That’s why it’s important to work with a company that you can trust, like Arbor Builders, when you set out to build your next home. Contact one of our agents today to walk you through the process and find what programs work for you.

This article was originally published to Arbor Builders’ website in Sept. 2921