If you build it, they will come... continued!
January 30, 2021
If you happened to dive into my previous article, we were discussing new housing construction. With the current lack of inventory in the housing market, which the National Association of Realtors (NAR) projects will continue well into 2021, we will see an approximate three percent appreciation in housing values in 2021. Active listings are down nationwide over 38 percent adding to a continued shortage of homes to meet demand. Anyone who has been though Economics 101 would understand the supply and demand effect here.
Feel free to refer back to my previous article to learn about a few different types of new home construction while we move on now to financing. When you want to build a new home and the builder cannot finance it for you, you have a few options. Just note going forward, if you are not building with your own cash, it is likely to cost you more to finance your dream home. Here are a few types of financing:
Hard Money: Google hard money lending and you will get everything from "hard money is for suckers" to "pro-flipping tips"... this should give you the idea of typically who you would want, or use hard money. This is a common form of financing used for building or flipping when the time frame is going to be short and the debt paid off quickly. Ask any contractor and you will likely find that your new custom home is at least 8-12 months away from move-in ready. Especially right now with our current pandemic situation and extended times in county plan check and field inspections. Hard money interest rates are likely the highest and therefore you don't want to have that debt sitting out there for long. However, it can be the quickest and easiest way (with the least restrictions) making it an option worth considering.
Crowd funding and private investors: crowd funding is gaining popularity amongst investors and those seeking money to build projects. Private investors and crowd funders are typically those who don't have enough cash to fund an entire project, or just don't want to put all their eggs in one basket, so the risk of loss is reduced. There are companies who specialize in crowd funding who evaluate your project and present it to a pool of people or make it available in their portfolio so it can be reviewed and the decision made on how much money they want to invest. It can often take longer to fund your project because you have to wait until you have enough individual investors, but with the average Joe able to throw his $1,000 savings toward your project, and this source of investing being wildly popular with millennials focused on passive income streams, you might just be breaking ground before you know it!
One-time close construction loans and construction loans: I put these together because there are really only two main differences and the rest of the process is practically the same. This is the more traditional way to finance a custom home. You begin the pre-approval process just like you would if you were purchasing an existing home. Talk to a local mortgage professional about your current purchase ability and discuss your final mortgage qualifying factors. All of the clients I have worked with who have had a home built, or are currently walking through a complete pre-approval process as if they were buying and moving today, are signing a contract to purchase. But instead of a 30-day escrow, it is months from closing. A complete pre-approval will not only give you a clear idea of what you can afford, it will give your builder confidence in your ability to finalize the purchase as long as nothing in your situation changes during the course of construction.
Which leads me to a big difference between a standard construction loan and a single-close. With a standard construction loan, you are first getting a loan to fund the construction and the building of your home. Once the home is complete, you will repeat the loan process to obtain your permanent mortgage. With a single-close, you are doing both at once and as soon as construction is complete, your loan is rolled into your permanent mortgage. At first glance it may seem that a single close is a no brainer, but it truly depends on your specific situation, as there are definitely pros and cons to both.
I suggest that you meet with a local mortgage professional who has both options available to you, and who can help navigate which choice will be the best. If a lender only has one option available, they will likely tell you that is the best one for you, and that may not be the case. Quick ending note, you can often still use your favorite realtor to help look out for you even with new construction, so don't hesitate to ask. The next few months can be the perfect opportunity for research and planning, just in time to break ground in the spring!
You can contact Alysha Boles at (661) 858-7214, or visit http://www.advisoralysha.com.