As our economy continues to show signs of improvement, many are returning to homeownership or embarking on it for the first time. New trends are emerging for the first time in history. Millenials are considering new construction green homes or custom homes in place of starter homes, because they realize that the maintenance costs and effort will be significantly reduced – as will the utility costs. Even as our economy recovers, the stricter regulations enacted after the economic crash can make the process seem overwhelming. We have found that advance preparation is key in easing the administrative and financial headaches financing may cause, and recommend that our clients keep these simple tips in mind.
Be Realistic About What You Can Afford
Figure out what you can comfortably pay on a monthly basis. Write down all your monthly expenses including loan payments, utilities, insurance, credit cards and don’t forget food, clothing and entertainment expenditures.
When determining the monthly payment you can afford, remember that in addition to the monthly principal and interest, you will also be paying into escrows for property taxes, hazard insurance and possibly mortgage insurance or a homeowners or condominium association assessment.
Many real estate-focused websites have mortgage calculators that are a great way to figure out what your monthly payments would be based on current interest rates and down payment amounts.
Pay Down Your Debts
Debt that you carry on your credit cards will limit the amount of a loan a lender will be willing to give you. Lenders typically want to see a total debt service ratio that is less than 40 percent of your monthly income.
Get Objective Advice
Attend a first-time home buying seminar or talk to a credit counselor who does not work for a lender. The U.S. Department of Housing and Urban Development (HUD) offers free housing counseling and seminars; visit www.hud.gov or call HUD’s interactive voice system at: (800) 569-4287 for more information.
Know Your Loan
The financing process for new construction custom homes differs substantially from the financing process for an existing home. Most often, a Construction-Permanent Financing loan is best suited for a homebuyer’s needs. With this loan product, your loan starts out as a construction loan and during the construction phase, you will often pay down the interest for a period of 6 to 12 months. Your builder then receives periodic payments that tie to your construction schedule. These may be referred to as “draws.” While terms may vary, depending on your lender and product, these are often the standard terms. When construction is complete, the outstanding amount of the loan then converts to a permanent (traditional) mortgage – which may be fixed or adjustable in rate, and up to 30 years in amortization. The terms of your permanent mortgage are generally determined up front, prior to start of construction.