Home building is the act of building a home, typically called a ‘house’ by those who may later or now live in it. The act itself is an ongoing endeavor, the result of an agreement between the builder and the individual who will one day occupy the home. Much attention is paid to detail – from choosing the location for the building, through to the overall design, functionality, and maintenance. In addition, the building itself is subject to local building codes, rules, and regulations.
Much attention is also paid to financing. Whether a builder approaches a bank or seeks out traditional lenders for a loan to finance a home construction project, there are many factors that should be considered before entering into the process. These factors range from taxes, insurance, and down payment amounts needed for the new home, down to what type of home construction and materials will be used.
Many individuals face the decision of whether or not to pursue a home construction loan through a bank, the lender of their choice, or a combination of both. When deciding on a bank loan, individuals should consider the interest rates, repayment terms, and reputation of the lender. Many banks offer lower interest rates than other lending institutions, however, borrowers must still pay higher interest payments and pay off their home construction loans early. Borrowers interested in a combination of lender types should research the rates and terms of each option.
Construction loans are made to pay interest on a home builder’s promise to finish the project. While this seems like a good idea, there are many disadvantages. Typically, interest rates on construction loans are variable, which means they can change over time; if the builder isn’t able to meet the deadlines required by the contract, interest may skyrocket. Also, when a builder fails to pay interest on the loan, the borrower is responsible to pay the balance himself/herself or through legal action.
Construction loan providers provide the borrower with an opportunity to choose the right lender for their home construction needs. Home buyers have the option to select from several lenders. Construction finance providers act as third party contractors that negotiate the purchase price of land with the lender and manage the construction loans. They will be responsible for collecting the money owed on the home loan and delivering it to the lender when it is time for the loan to be paid off. Construction loan providers have the ability to approve home loans quickly, but their interest rates are typically higher than other lenders.
Construction finance companies act as the lender for the home builder only. This allows them to keep more of the profit from the sale of the home. Some construction finance companies offer homebuyers loans with lower interest rates than local lenders. This offers the buyer a chance to get the home they want at a better interest rate. Construction finance companies also take on the risk of financing a home, which can come with a higher interest rate. In most cases, they require borrowers to put down a significant down payment in order to secure the loan.
A builder’s end loan is simply the home loan, the builder receives from the construction loan provider. The home end loan is not associated with the home, and the lender is not considered the end buyer. The home builder retains ownership of the property, and the lender will make payments to them until the entire loan has been completed. When a home buyer needs a home loan to buy another home, they usually go to an end loan provider.
Building supply stores often carry both types of loans. Lenders that work with builders offer home-to-builder financing, or build-to-permanent financing. Builders can complete projects on their own time, and may not need to wait on the bank to approve their loan. If a builder completes a large project and the necessary permits are in order, they do not have to wait for approval from the lender. As long as the builder follows all applicable laws, uses quality products, and keeps the building up to code, they can get a home-to-builder loan. They may still need to obtain a home construction loan from a lender to finish the rest of the project.