The Basics of Custom Home Financing

January 13, 2017

Building a custom home is a major project that will no doubt have you thinking a lot about money. If you’re lucky, you may have finances available to pay out of pocket. However, in most cases, buyers need to take out a loan. As with any lending process, financing custom home construction consists of several steps and can seem overwhelming at first. It may take several meetings with your lender and homebuilder before things start to become clear.

The purpose of this article is to provide a basic overview of the custom home financing process. It will give you an idea of what you can expect should you need to get a loan, and it will, hopefully, make you more comfortable when you get started.

A Different Form of Financing

Chances are, you’re familiar with basic mortgages, which are very common and understood by most homeowners. Financing a new home is more complicated because you must consider the construction of the home. Depending on the circumstance, a construction loan may be needed to fund construction. The loan lasts only until the home is completed. After that, it would convert into a mortgage.

However, this isn’t the only path that’s available. For instance, some homebuilders sell lots and finance the building process for the buyers of those lots. The builder will usually require a 20-25% down payment to serve as earnest money. The reason for the high payment percentage is because financing custom builds involves much more risk because there’s no collateral (finished home).

The Custom Home Financing Process

If you’re preparing to finance your custom home, here’s a look at the steps of the process:

  1. Set your budget- It’s important that you have a final purchase price in mind early on. Not only that, you need to ensure you stay at or below that target price. To do so, discuss with your builder the full scope of the project. This includes choosing the home style and finishes. When you and your builder are comfortable with the budget, leaving some room for changes and unforeseen issues, you can move on to the next step.
  2. Get preapproved- This is the point when your lender would take into consideration your budget and go through some of your financial information to determine if you qualify for the loan. If everything checks out, they’ll preapprove you.
  3. Submit a formal application- After getting preapproved, you need to finish up (as much as possible) the plans for your home. This involves meeting with your builder to finalize your contract, going through paperwork to ensure everything is accurate and in order. Once your contract is signed, you can submit a formal loan application to your lender.
  4. Submit documents for a financial review- Unlike the preapproval process, which is based on a brief check of your financial situation, getting final approval for finances is a much more in-depth process. When your application is received, the lender will request from you several documents so they can gain a thorough understanding of your financial situation. Once the lender receives all your information, your loan application is reviewed by the underwriter to ensure everything checks out and the application is complete.
  5. Receive a mortgage commitment- Once the underwriter has approved your mortgage, the lender will issue a mortgage commitment. This is an assurance to your builder that they are committing to lending you money. If you satisfy all the mortgage commitment’s terms of condition, the project can move forward.

Advice from an Expert

To make the process easier, surround yourself with experts. You will have a smoother, more enjoyable experience if your lender and your homebuilder are experienced and reputable. Financing a home build is a complex, sometimes lengthy process, so you’ll want to work with people who can provide guidance every step of the way.

According to Rebecca Mott, VP of Mortgage Lending/New Construction Specialist for Guaranteed Rate in suburban Chicago, borrowers can make things easier by reading all correspondence (emails) thoroughly, responding in a timely manner, and providing all requested information when inquiries are made. It’s helpful if you locate as many financial documents as possible when you get started.

In Mott’s experience, one of the main reasons the financing process gets delayed is that borrowers can’t locate certain documents or are slow to submit them. The underwriter needs a clear picture of the borrower’s finances, and they’ll need to go through several documents before providing approval. It takes time, and your cooperation will help avoid delays.

Learn More About P.D.H. Builders

P.D.H. Builders is a trusted custom homebuilding company that operates throughout Chicagoland, including Lemont, New Lenox, Mokena, Frankfort, Orland Park, and Homer Glen. Homebuilder Phil Hartz has more than 30 years of industry experience and has worked with Rebecca and her team at Guaranteed Rate for more than 20 years to help buyers who need financial assistance. For more information, contact Phil at 708-949-8244 or pdhartz@gmail.com.

You can also visit P.D.H. Builders’ model home in the Stonebridge Woods community at 13935 S. Stonebridge Drive in Homer Glen.