You think you’ve decided to build a rural home…now what? Like most people, you may need financing to cover the cost of the house. Getting a loan for building a home is different and more complex than getting a loan for a finished house. As you research your financing options, below you will find answers to the questions we get asked most frequently about construction loans.
How does a construction loan differ from a traditional home loan?
Construction loans are structured to provide you a specified amount of time and financial resources to build your home. These loans have a disbursement process that releases funds throughout the construction process.
Rural 1st structures construction loans to be consumer friendly by offering fixed and adjustable rates, phased disbursements, and a one-time closing. Unlike traditional mortgages, the value of the home is calculated based on the anticipated completed value of the home using the plans, bids, and specifications provided to the appraiser.
How do I calculate what my new home construction costs will be?
Knowing all the costs to construct your home is critical to the success of the project. In addition to the builder’s bid, you’ll need to consider the expense of the lot, site preparation, water/sewer and electrical/gas access, and driveway access. There are also some unforeseen expenses including architectural drafts, builder’s insurance, and permits to name a few. Working with a reputable builder will help set you up for success and transparency around many of these expenses. If you do not see these types of expenses on your bids, that’s a red flag to ask more questions.
How much total cash will I need to build a new house?
Calculating your total cash needed to start your home building project is an important step to knowing how much house you can afford. While there are several variables that impact the amount needed, the primary cash requirements are down payment, loan closing costs, and a cost overruns safety net. The down payment varies based on the type of home you decide to build and any equity that exists in your land. Loan closing costs vary based on loan amount. Your cost overruns safety net is based on the cost to construct your home.
How do I know what portion of my construction project can be financed and can I figure this out before I have final plans and bids?
The financed amount of the project will vary based on the type of home built and how much of the work you plan to complete yourself (if any). The financed portion of the project can be as high as 85% of the appraised value of the completed home and land. This completed value is determined utilizing the plans, bids, and specifications provided compared to other homes with similar characteristics. The more complete the plans, bids, and specifications, the more accurately the appraiser can value the completed home.
What are the benefits of a one-time close construction loan and how does the process work?
Construction loans are unusual in that you’ll find different lenders with either a one-time or two-time close process. Rural 1st uses the one-time loan closing because this process allows borrowers to close with a fixed low interest rate, a lower down payment, and only one set of closing costs. The one-time closing process does not require you to go through another loan application or approval process. The one-time loan closing occurs prior to construction beginning. The loan funds are disbursed over the course of the construction.
What will my mortgage payments be during construction and once my home is complete?
For the first 12 months, you will pay interest-only based only on the funds that have been distributed. If your loan is adjustable rate, your monthly payment could also change based upon fluctuations in rate after your loan closes. At the end of the 12-month interest only period, the full principal and interest payment will be begin. Review the Closing Disclosure and Note that you receive at loan closing for more detail on the repayment obligation.
How does a construction loan work if I need to purchase my lot versus already owning my lot?
Whether or not you own the lot you plan to build on, we can help. If you haven’t already found and purchased your lot, we can take care of financing that too. It is best to work with a reputable real estate agent who can help you evaluate the features of the lot and how well it will align with your desired outcome. It is best to already have an idea of the home you want to build before you purchase the lot.
If you already own the lot you plan to use, this land will be included in the appraised value. If you have any existing loans on the lot, they can, but are not required to, be refinanced into your construction loan, so that you have one easy to repay mortgage loan. If you own the land free and clear of any loans, the value of the land will help offset your down payment requirement.
Do I need to work with a specific builder?
Selecting your own builder is one of the most important decisions you make. At Rural 1st, you pick your own builder. Rural 1st does not maintain a list of approved builders, but we reserve the right to reject a builder based on our internal criteria. You should thoroughly vet any builder or sub-contractor you are considering. For example, read online reviews, ask about their credentials including whether they are licensed and insured, ask for references, and look at examples of previous projects to help you decide if they are the right choice for your project. There are also trade groups, such as the National Association of Home Builder’s, who provide helpful information on selecting a contractor. See nahb.org/other/consumer-resources for more detail. Your state's home builder association may also have resources to aid in your selection.
What types of homes does Rural 1st finance?
When it comes to selecting your home’s design, Rural 1st can work with you to build a wide variety of home types. The standard ‘stick-built’ or modular constructed homes are the most common types. We can also finance more unique homes including barndominiums, machine shed, berm, log and post-frame homes.
How long do I have to build with a construction loan?
Rural 1st offers a 12-month construction period to build your home. While 12 months sounds like plenty of time, it can go by very quickly. Building supply shortages, adverse weather, and labor constraints can all lead to delays. If a construction loan is not fully disbursed within the 12-month construction period, additional fees will apply. More specifically, you will pay an Undisbursed Loan Fee based on the following formula: 0.01% per day multiplied by any undisbursed loan amount at month end. The fee will be billed monthly until the loan is 100% disbursed.
The construction process can be daunting, but we’re here to guide you every step of the way. Visit our construction loans page to learn more about home building.
