How To Finance A Custom Home Build in San Diego
Building your San Diego dream home can be one of the most rewarding activities in a lifetime. Most people are familiar with buying a home and financing it through a traditional mortgage, but the custom home building process is a little different. At Buildable, a primary goal of ours is to simplify the entire process and that usually starts by clarifying how financing works, so you can move forward with budgeting for your custom home in San Diego.
The custom home building process is unfamiliar to most people and many are left wondering, how do I finance a custom home build? Well, to understand that, the first thing you must recognize is that you cannot build a home through a mortgage — rather, you need a construction loan.
The good news is that the construction loan process is almost identical to the traditional mortgage process. The primary difference between the two is that there are additional requirements of the builder when you get a construction loan. When you work with the team at Buildable, this is a negligible difference to you because we handle everything on the builders’ end.
Now, what if you have the 20% to cover the entire project, but don’t have the cash to cover the lot outright? More good news, you can get a lot loan with as little as 25% down on the lot. The loan can be funded in about 30 days and can enable you to move forward without outlying much cash. This is especially helpful if you plan on selling your current home to build a new one.
There are several different avenues to securing a construction loan and there are benefits to each. Most offer interest-only payments during construction, so you’re usually not paying the full loan cost during the build process when you’re still living in and paying for your current home.
You can also receive construction loans or lot loans through other sources as well. Here are the top 3 financing options available to you:
Commercial Banks:
Commercial banks have many construction loan options that fit most needs. The benefits of working with commercial banks include extremely competitive rates and the fact that the process is very easy and similar to a conventional mortgage.
Benefits
Rates at around 3% - 4%.
Interest-only during construction.
Converts to a 30-year fixed upon completion.
Private Lenders:
There are many private lenders who can offer a number of benefits to customers looking to take out a construction loan or lot loan to build a custom home. Private lenders are great for people looking for less loan prerequisites, faster funding times, and who are willing to pay slightly higher rates.
Benefits
Quicker closing times.
Interest-only during construction.
US Citizenship not required.
Self-Directed IRA:
A Self-Directed IRA is an individual retirement account that allows you to explore alternative investments for retirement savings, including property. Property is a great way to diversify your portfolio and it can provide you with a good, often great, rate of return.
Benefits
Diversify your portfolio outside of equities.
Buy, sell, flip, and accumulate properties.
The rental income earned remains in the IRA, building additional investing capital.
Top Questions to Ask a Lender about Lot & Construction Loans
What is my monthly payment before and after construction?
Typically, construction loans offer the first 12 months as interest-only during the construction of the project. This means that you ONLY pay the interest on what you borrow during the course of construction, and once construction is complete, you begin paying off the full loan cost. For example, if you have a $1M construction loan and you only use $100K on permits and lot improvements in the first month, you’re only paying interest on the $100k that you withdrew, not the full $1M. Once construction is complete, the loan can morph into a 15 or 30-year fixed-rate mortgage, and then you would pay based on the agreed-upon amount and interest rate.
What is the Loan to Cost (LTC) required for construction loans?
The LTC, or "loan to cost,” required for home construction loans is the ratio between what’s borrowed to the total cost of the project. A typical LTC will be between 5% and 20% when financed with commercial lenders and potentially even 0% with private lenders. We always suggest our clients put 20% of the entire project down to avoid wasting money on Private Mortgage Insurance (PMI) fees.
How does your construction loan rate compare to a regular 15 or 30-year fixed-rate home loan?
Typically, construction loans carry a higher APR and some even transform into a 15 or 30-year fixed-rate mortgage. Due to the higher interest rate, it might make sense to refinance after the construction period if you can get a lower rate, taking into account all loan fees.
As always, if you have any questions, please feel free to set up a meeting with us to chat.
