Florida Construction Loans
We have all heard it said before Location, Location, Location–it’s a big factor in the value for a home. Your selection of location goes beyond picking the best lot. You will need to purchase a parcel of land in a good community, that not only fits your life style and dreams, but is also capable of supporting all your needs. You may consider to be close to family, shopping, and work; or maybe this is a second home or a place for your planned retirement. Almost all people have this first part of the plan, and most often that is the only part.
When selecting a location, you should also consider the areas future plans for development. Most cities, towns, or counties have a master plan for development. You should try to have an understanding of how the area will grow and how that growth may impact the future value of your home.
Our lives change all the time, and for every location, you should always consider your potential resale value and area impacts. Thinking you have selected a nice parcel that backs up to a wooded area will give you privacy when in fact that area maybe designated for the new water sewer treatment slated for five years down the road on the county’s master plan.
It is much easier to ask questions today, rather than fight a big battle tomorrow.
Location can have an impact on the type of loan you may need to purchase your new home. Putting 20-25% down and using conventional financing is the most common and can be the most cost effective way to go with the least amount of restrictions toward location. Other types of loans such as FHA, VA and USDA may have greater flexibility for qualifying the borrower and yet may have limits and restrictions as to the location and type of home.
Get Pre-Qualified before you begin looking for a home or contractor. Knowing your comfort levels for a monthly payment is important but more so is having a total understanding of your financial limitations. Once you know and understand the maximum price limit you will spend on a home from there is when you can start looking for a location and then a builder / contractor. Do not look at homes or properties out of your budget, it is a common thing for people to want to do that and then they have trouble getting their mind set back to reality. This can cause borrowers to over spend then fail to have enough funds for a closing or even default on the loan or the contract and losing their original deposit.
Knowing and understanding the conditions for the financing of your new home to be constructed, in conjunction with the builders contract to build, is very important. Lenders have different time frames and draw schedules that allow for construction financing. Although most are similar in nature they do vary from lender to lender. The term of the construction time frame of the loan can vary from six months to two years. This is important to you as the borrower, as you are paying the interest on the amount borrowed, the real estate taxes and insurance for the property.
Selecting a builder is just as important as selecting the lender. The builder has the ability to complete the home in the contracted time fame. You should make sure the builder’s contract and commitment to complete the construction matches the time frame in the construction loan time frame. Be careful of selecting the lender who is embedded with a builder / developer. Most often, builders will take off $5,000 to $10,000 off the price of the home if you use their lender. However, a lot of these lenders may not require an appraisal of the home, which could mean you are over paying for the home. Important questions to ask are: “Who is being charged the interest on the loan during construction?” “Does the builder require a large down payment?” Is the down payment being held in an escrow account, or is the builder using your funds to build his development?” If this happens, your deposit could be at risk if the builder / developer goes bankrupt.
Knowing and understanding that you do have different construction mortgage loan options, let’s talk about that builder option to save $5,000 to $10,000 for using their lender. You need to ask yourself, are they working in your best interest or the builders? Next, are you going to purchase the land first and then hire the building contractor or do you intend on buying a home to be constructed on the builders owned lot or parcel?
As a former building contractor with over 18 years of experience, I am going to give you information that’s going to help you make better decisions about your personal needs for building your new home.
It is my opinion that a consumer’s first choice should be to select and purchase your own buildable lot. This choice, grants you the right to choose your own building contractor. When you own the land, and you hire and select the building contractor, you have more control and leverage in keeping on schedule by holding the authority to terminate the contractor and his sub contractors. Hiring a building contractor, they will ask you for a large deposit up front toward the lot of land, or to transfer over the title to the lot you have already purchased, for the purpose of construction. I am highly against this practice. I highly recommend you hire a real estate attorney to represent you before your transfer title over to a building contractor for the construction phase of your home.
The second choice for a consumer would be to construct a home with a building contractor on land owned by the building contractor. In this situation, it would be in the best interest of the consumer to purchase the home as an end user and have the building contractor obtain his own construction loan. I also recommend that you hire a real estate attorney and that your deposit be held in escrow and not used for construction as a non refundable deposit.
A note about building in a single or limited builder controlled subdivision, these sub divisions have economies that are more controlled by the developer rather than the natural real estate market. Example: if a builder is building 500 homes in a subdivision. Chances are, the first 20 or so homes will be built at a discount in order to stimulate interest in the sub division and offset the initial cost, providing cash flow for the builder. After this first phase you will generally see pricing increase steadily. When the developer reaches the end of the project, generally, the last 5 to 10% of the project pricing will drop in order to close out the development in a faster manner. This benefits the developer in many ways, but more importantly, it may have a negative impact on the home values of the existing home owners in that controlled sub division.
Remember you can apply for a construction loan through a mortgage broker and from financial lending institutions such as banks, private lenders, and insurance companies. There are two main groups who seek to use a construction loan, builders and potential home owners. Construction loans are different than standard mortgage loans, as they generally have two phases: a construction phase–which is in its generally a short term loan– and the end loan closing for your permanent loan. Know your cost and all your options for the entire mortgage loan and construction processes.
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