Building your custom dream home in Central Florida could be financed through a new construction loan. This post will explore some common questions surrounding construction loans for new construction homes in Orlando and how they can make custom home-building projects budget-friendly and achievable.
What Is A Construction Loan?
Construction loans finance home construction and a borrower only pays the interest on the loan during the construction phase. Once the work is completed, the loan is paid off or converted into a permanent mortgage.
How Can A Construction Loan Be Used?
While every construction loan may have some variation, generally, construction loans can be used to finance land, design plans, obtain permits, cover labor fees, purchase materials, and provide backup contingency reserves in case a project goes over budget.
When using a construction loan, funds are divided and dispersed in phases rather than issued in a lump sum. Lenders pay custom home builders in draws, which are installments that cover each critical phase of the building process, such as:
- Land grading
- Foundation pouring
- Framing
- Finishing work
- And more
Regular inspections are required to obtain draws. The amount of each installment depends on the completed construction work outlined in the inspection report.
It is important to note that while construction loans work for building new custom homes, they do not work for new production homes. In high-growth areas like Central Florida, it is a common practice to repeat premade home designs in high-volume neighborhoods where population growth increases rapidly. A developer or home builder finances the construction process when building a production home. After construction, a homebuyer purchases the home from the builder either as a traditional mortgage or with a cash payment.
Types Of Loans For New Construction Homes In Orlando
Construction loans help make the custom home construction process feasible and more affordable. Every custom building project is different and nuanced. Enlisting the help of an experienced loan officer can help with making the best loan choice. Here are two types to consider:
- Construction-To-Permanent Loan: A construction-to-permanent loan is also known as a single-close or one-time close loan, which means the borrower only pays closing costs once. This type of loan also allows for locked-in interest rates at closing. Additionally, lenders can provide a float-down option. This option allows a borrower to lock in a lower mortgage rate if the rates decrease during the building process.
- Construction-Only Loan: A construction-only loan requires the loan’s payoff when construction is complete. These types of loans are also known as two-close loans because they need a borrower to get approved and close for the construction loan and again for the permanent mortgage. While paying for two loan closings can be a downside to this type of loan, the benefit is that it allows a borrower to compare different lenders to get the best deal on both the construction loan and mortgage.
5 Steps To Getting A Construction Loan
#1. Know borrower requirements: Every lender’s requirements differ, but construction loans tend to have stricter standards than traditional mortgages. Generally, they require a credit score of 680 and above. Additionally, a new construction down payment of 20% is usually required.
#2. Compare lenders: Not all lenders offer construction loan options, so it is important to compare lenders and ask for recommendations from family, friends, and local contractors.
#3. Apply to get prequalified: The next step is to apply for prequalification. This step provides a general understanding of the loan amount and terms a lender will approve. W-2 forms, tax returns, bank statements, project plans, and more may be required.
#4. Hire a professional contractor: It is crucial to partner with a contractor that works within budget and on time for the steps of the construction loan to work as planned.
#5. Get initial and final preapproval: In addition to the forms needed for prequalification, the lender may also require a detailed budget for the construction project, signed construction contract, planned start and completion dates, and more. For a construction loan to process quickly, it is crucial to have documents accessible and work with a trusted and professional custom home contractor.
Building New Construction Homes In Orlando With The Meinhart Homes
At Meinhart Homes, we have over two decades of experience building new construction homes in Orlando. Our highly professional team of custom home builders uses efficient project timelines and effective construction practices to help our clients utilize these types of construction loans to finance the building process of their homes. Contact us today to learn more about how you can partner with our team and use a new construction loan to make your custom dream home a reality.
