New Construction End Loan

by | Aug 30, 2022 | Blog

When you’re buying a new construction home where the builder is taking on the expense of construction up front, this makes the process infinitely easier. In this case, you do not have to take out a construction loan, which generally has a higher rate of interest. Lenders consider construction loans riskier because there is no house as collateral. If your builder finances the construction, all you need to do in terms of financing is to obtain a mortgage so that you can close on your house when the construction is complete.  

Construction time is a prime consideration when it comes to obtaining a mortgage. According to data from the United States Census Bureau, the average time from start to completion of a new construction home in the northeast in 2021 was 10 months. During construction time, mortgage rates could fluctuate considerably, and a buyer could end up with a significantly higher mortgage payment. 

To avoid this, a buyer can look for a lender that offers a new construction end loan. This type of mortgage loan allows a buyer to lock in an interest rate for a specified period of time, which varies per lender. A fixed interest rate during construction protects the buyer from rising interest rates, giving him/her peace of mind because the interest rate is a known factor in calculating the monthly mortgage amount.   

Keep in mind that once a buyer signs a purchase and sales agreement for a new construction home, the builder will require a mortgage commitment in short order. To eliminate the stress of scrambling to find a lender, fill out a mortgage application, assemble documentation, and wait for approval, a savvy buyer can apply for a mortgage pre-approval from a lender by submitting a formal loan application and the necessary documentation to back up information about income, assets, debt, and employment. This may include W-2s, pay stubs, tax returns, asset statements from banks, brokerage firms, and retirement accounts, records showing mortgage or rent payments, and a credit report.  

If approved, in exchange for the extensive documentation, a lender will issue a statement specifying the maximum loan amount and a commitment to fund the mortgage, which is what the builder needs to secure your purchase agreement and move forward with construction. Pre-approval puts a buyer in a great position for purchasing a new construction home because it shows the builder that the buyer is serious and will be able to close on a mortgage loan. In a highly competitive new construction marketplace, preapproval gives a buyer an advantage and eliminates the stress of hurriedly obtaining a commitment from a lender.