When you decide to build a home, you’ll need to get a construction loan. A construction loan is underwritten to last the length of your build project (usually around 12 months) and can include the price of your lot. During your home’s construction, you’ll pay for labor and materials as needed–this is what’s called a “draw request,” and it’s taken out of your loan bit by bit so that at any given time you are only paying interest on the amount of the loan you’ve used so far. This keeps you from paying interest on the price of your completed home when you don’t even have drywall yet!
Once your home is built, the construction loan disappears and what’s remaining is what your mortgage is going to cover. You don’t necessarily have to get your mortgage loan from the same company that gave you the construction loan. However, if your project exceeds $417,000 it’s considered a non-conforming loan and you may have to meet additional requirements to get a lender.
You have two options when it comes to construction loans–a one-step or a two-step loan. A one-step loan essentially means that you’re getting your construction loan and your mortgage loan from the same place. This is convenient because there is only one set of closing costs and fees; however, a one-step loan typically comes with a higher interest rate and is not a good fit for custom projects since the budget is set from the beginning.
A two-step loan is a better fit for custom projects because it provides more flexibility with project costs and timeline, and it gives you the added benefit of being able to shop around for the best mortgage rate. The only downside is having to pay closing costs on both the construction loan and the mortgage (and the land, if you paid for that separately).
In order to qualify for a construction loan while continuing to carry your current mortgage payment, the two payments should not exceed 36% of your gross income. Before you apply for the loan, you’ll need to know your project timeline, cost estimate, and have building plans drawn up. You’ll also need to be able to make a 20-30% down payment on the cost of the land plus the home. Your lender may consider your land value towards your down payment if you already own the land you’ll be building on.
If you have any additional questions about how construction loans work or the process of building a custom home in Northern Virginia, contact Classic Homes today! Our On Your Lot sales center can be reached at (703) 583-3500.