Financing New Home Construction

Buying a house is a top priority for most people, but given the current conditions of the market, and the increasingly tight lending standards, it has become hard for people to cross “buy a house” off their bucket lists. Even more difficult, if possible, is the process of building a house from scratch. However, if you have a house in your mind which you want to see realized, there are certain tips and methods you can use to finance your new home construction.

Construction Loan

A construction loan is the most traditional method for financing new home construction; however, it can be hard to qualify for. The requirements are exceedingly strict and a near faultless credit score is crucial if you are to have a hope of being approved. Make sure you take all of your income and debt documentation along when you go to the bank or another lending institution to apply for the loan. Keep in mind that you might be required by the bank to make a few changes in your debt-to-income ratio before they issue you the loan. It is also important to remember the fact that construction loans usually have a very short life – this means that you cannot keep the terms and interest for too long. For example, if you keep the loan active for longer than a period of around 6 months, the interest will grow unbearable after some time.

Home Equity Line

Since the more traditional methods are fading away, and the economic downturn has made it hard for people to obtain construction funding, many are turning towards more unusual methods for financing new home construction. One such method is to turn your existing home equity into a potential way to finance the construction of your new home. The effectiveness and success of this method depends on how much equity you have available in your current property or home. Since equity can only a certain percent of equity can be released, it is best to employ this method if you have your own home – it is not frequent for homeowners to borrow the whole of the appraised value of their home. If you have secure financial backing, a home equity line can be just right for new home construction – if you do not, both your homes may be at a risk of foreclosure. This method offers lower closing costs, and the knowledge that your current home will easily sell or rent once the new one is built is also a great relief.