Whether you’re a first-time buyer or a repeat homebuyer looking at new construction for the first time, the process of financing your purchase is an essential element to your success. Most builders have a preferred lender or several preferred lenders that they recommend to buyers, which can make the process easier since the lenders are experienced with new home construction timelines. However, you aren’t obligated to work with a specific lender and should take the time to educate yourself so you understand your financial commitments and options.
Financing a new home compared to a resale
When you finance a resale home, the typical process is to contact a few lenders, choose a lender and a loan program, get preapproved for a loan and then lock-in the interest rate once you have a ratified contract. You’ll typically go from contract to settlement within 30 to 60 days. The process is similar if you buy a new home that’s already complete or nearly complete.
In contrast, when you buy a to-be-built home, you’ll typically wait for at least four months but more often six to nine months for the home to be finished. One benefit of this waiting period is that while you’ll have a preapproval for a loan in hand, you can take this time to build up your savings even more in anticipation of your move.
Start with a preapproval
Before you begin shopping for a home you should consult a lender and get a preapproval for a mortgage. If you already have an idea of which builder you want to buy from you can contact a preferred lender for that builder. If you’re not sure about the builder or community, you can go through the preapproval process with any lender you choose. A preapproval will require you to gather all the financial documents required by your lender and to undergo a credit check. Take this step early in your home search so you can make improvements to your credit if necessary and so you understand your budget.
While loan qualifications vary from one lender to another and with different loan programs, most lenders require a credit score of 620 or 640 or higher for a loan approval and a credit score of 740 or above for the lowest mortgage rates. You’ll also need to keep your debt-to-income ratio – which compares your monthly gross income with the minimum payments on your credit cards, loan payments and housing payments – under 43 or 45%.
Keep in mind that your lender will tell you the maximum amount you can borrow, but you should look at the estimated monthly payments for that loan and determine your own comfort level within your personal budget. Remember, too, that when buying a newly built home you’ll be paying for the base price, possibly a lot premium and optional features with your loan.
Estimate your cash needs
Your lender can also show you various loan options with different down payment requirements. Some borrowers may be eligible for a low down payment loan requiring just 3% of the purchase price or a federally-insured loan (FHA loan) with just 3.5% down. A lender should compare all options in the context of your finances.
You’ll also need funds for closing costs, cash reserves and moving costs. Your lender will give you an estimate of your closing costs, but many builders offer to pay closing costs if you finance your home with a preferred lender.
While it’s recommended that you shop around for a lender you trust and a loan program that fits your needs, there are advantages to working with a builder’s preferred lender. First, builders often offer incentives as mentioned above, such as paying closing costs or including an option or two such as a sunroom, a finished recreation room or a kitchen upgrade for using their lender. Second, these lenders work closely with builders and have an incentive themselves to make sure your loan goes through on time.
Builders want buyers to use the preferred lender simply because of the level of experience these lenders have and the reduced risk of last minute loan complications.
If you already have a preapproval from another lender, you can still go to the preferred lender to apply for a loan. The new lender will need to document all of your finances and check your credit, but the process should be easier the second time around because you should have all required documents and information readily available.
Locking in your mortgage rate
Preferred lenders also offer the advantage of being able to communicate easily and often with your builder to identify the appropriate time to lock in your mortgage rate. Some lenders will allow a six to nine-month lock, but you’re likely to pay a slightly interest rate or pay a deposit to lock your rate for a long period. Most borrowers prefer to lock in their rate when interest rates are low and within 30 to 60 days of their closing.
Keeping your credit profile stable
Keep in mind that your credit will be checked again just before your closing, so don’t buy a car, apply for more credit or buy furniture for your new home with a credit card. Your credit profile should be the same or better from your preapproval to your closing – if not, your interest rate could change or you could even have trouble qualifying for your loan.
Finding the right lender, especially one with experience with new construction, can make financing your home a pain-free process.
Interested in a new home in St. Charles? Click here to download our free Homebuyer's Toolkit www.stcharlesmd.com/Toolkit.
Michele Lerner is a freelance writer with more than twenty years of experience writing articles and web content for newspapers and magazines on topics related to real estate, personal finance and business. Her work has appeared in The Washington Post, NewHomeSource.com, Realtor.com, Bankrate.com, Insurance.com, HSH.com, The Washington Times, NAREIT's Real Estate Portfolio, and numerous Realtor association publications. Her latest book, "New Home 101: Your Guide to Buying and Building a New Home" and her first book, "HOMEBUYING: Tough Times, First Time, Any Time" are available now at Amazon.com or from MicheleLerner.com.