An Overview of the Colorado New Construction Financing Process
Financing new home construction involves several key steps:
- Choose a location, builder, and floor plan. Once these have been determined, a construction budget can be outlined and agreed upon. It is important to keep your Realtor involved in your thought process as you start thinking about building a new home.
- At the same time, you should start working with a mortgage consultant regarding permanent financing. The permanent financing should be designed around your financial goals and needs. This process also helps determine a potential price range. Buyers starting this process should have an idea of their monthly payment comfort zone (How much do I want to spend each month on my new home?). Permanent financing takes into consideration a number of different factors.
- Construction financing will be obtained once permanent financing has been secured, so it is important that you be preapproved with your mortgage consultant early in the process of thinking about building a new home. Your mortgage consultant will take care of connecting you with a construction lender and facilitate the construction loan approval process.
- Typically the lot is purchased and construction can begin on your new home when the construction loan is closed.
- Monthly draws against your construction loan pay for the construction of your new home. You make monthly payments on your construction loan that are based on the outstanding balance. In some cases your payment on the construction loan can be built into the loan itself, eliminating your out-of-pocket costs during the construction process.
- Once your new home is completed, you close on your permanent financing (or the loan converts to a permanent loan, depending on whether you've engaged a one close or two close construction loan) and begin making monthly mortgage payments.
- Many times permanent and construction financing can be secured without having to put money into the transaction. The end result can be a new home with a mortgage for 80% of the appraised value - having put no equity into the process. This is achieved by evaluating the difference between the cost of building and the final value of the home once it is built utilizing two close construction financing.
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