April 22, 2022 by Space Coast Credit Union
When you want to move into the house of your dreams, building a new home—rather than buying one that already exists—offers plenty of benefits. This article covers all of its rewarding benefits and takes you through the process step by step when you’re exploring the right construction loan for your needs. So, let’s dig in!
Here you’ll find more information about construction loans at SCCU
Construction Loan Definition
What exactly is a construction loan? According to the Consumer Financial Protection Bureau
, a construction loan provides the funding needed to build a home. Funds borrowed are typically released in a series of advances (or “draws”) to pay for expenses as the building is being constructed. In some cases, a construction loan automatically converts into a long-term mortgage loan (in other words, “construction-to-permanent” loans). Other times, it’s simply a short-term loan that funds construction. Then, the borrower would have to either pay off the loan or, more typically, refinance it into a mortgage loan.
Benefits of Building a Home
As long as you stay within your budget and comply with community building regulations, building your own home allows you to personalize the structure to your specific tastes in ways beyond buying an existing home: from the architectural style to the interior floor plan and from the color schemes to the lighting, and much more.
Do you need home office space? Include it! Do you appreciate the idea of multi-purpose rooms? Go for it. Does solar energy appeal to you? Incorporate it. The possibilities are endless!
In fact, when you build your own home, you can benefit from the most energy-efficient building systems and materials available today, an eco-friendly structure that can save you money on energy costs going forward. Plus, the home is brand-spanking new—which means that many systems will be under warranty, and maintenance and repair issues aren’t likely for a few years.
From the Ground Up
When you apply for a home construction loan, the house only exists as an idea. In fact, you may not even have a piece of land in your name. So, as part of the process, you’ll either need to purchase a lot or have a purchase agreement for the lot you plan to buy and build upon.
You may end up buying a lot from the builder you select, or, if the builder owns the lot you desire, the cost of the property may be included in the overall price of the builder’s quote for home construction.
Lot selection is crucial for many reasons, including the obvious one: this property determines where you’ll build your new home, your neighborhood, the surrounding community, and ultimately, where you’ll live.
If you enjoy living in the midst of hustle and bustle, it’s a good idea to choose a lot where you’re close to dining, shopping, and recreational venues. If you prefer tranquility, consider a lot in a more natural setting with trees. If you’re looking for a quieter lifestyle, check with your local government to see what future growth plans exist for your area of choice. Are you responsible for adding any utility-related features? Do you have clear road access?
This is also an opportunity to compare what you plan to build with what other homes are appraising and selling for in the area surrounding your lot. Home values significantly depend upon a structure’s location. (Or, as a real estate agent may tell you, the three most important factors to determine home appraisal values are: location, location, location.)
Investigate how ready the lot is for building. Some are build-ready, which means utilities and other services are in place for that lot. Others are still unimproved, which means that you’ll need to wait for basic services to be established before building upon that piece of property. The wait may be short—or it may not. Factor that into your lot selection.
Get the land surveyed to have a clear understanding of your exact boundaries and see what easements exist. An easement may exist because of a neighbor’s driveway or because of an underground utility or power line. No matter why an easement is in place, it means that someone else has a specifically-defined limited use of that portion of your property. Is that easement acceptable to you? If not, consider another piece of land.
Learn what zoning ordinances are in place for your chosen lot and whether this property will fall within a homeowners association (HOA). If it does, make sure you’re comfortable with the HOA fees and restrictions, and get a clear understanding of the benefits you’ll receive as an HOA member.
Find out if you’ll need to purchase flood insurance because of the lot’s location on a flood plain. Also, investigate the flood insurance cost, which will be above and beyond regular homeowners insurance, and include features you’ll need, such as hurricane shutters, in your building plans.
Brainstorming Your Dream House
Just like when you plan to buy an existing home, it’s helpful to do the following for building a new home
- Make a list of your must-haves and dream-haves, such as the number of bedrooms and bathrooms you’d like, along with other features that you have in mind. If you’ve visited open houses lately, consider what really caught your eye and interested you.
- Think about what you’ll need now and what you might need in the future. Is this where you’ll begin and raise your family? On the other end of the age spectrum, do you plan to retire here? Each of these scenarios will come with different wants and needs.
- Imagine this house on the land you bought or will buy. What’s the best way to situate windows for natural light and help with energy efficiency? Would the exterior color, landscaping, add-ons, etc., meet your neighborhood’s required ordinances and regulations? After you’ve come up with a good list of needs and wants, you can then select the right general contractor to build your home.
This builder will translate your ideas into a tangible form for your approval. This will allow you to “see” what your preferences would look like in a new home—and, thanks to today’s building industry modeling applications, contractors can quickly and easily use technology to add and take away features in a computerized rendering.
What are today’s home trends?
You may find inspiration in what’s trending in new construction builds, especially since many of them are so well suited for Florida living.
Today’s home designs are curvier than ones from the recent past, often including arches and vaulted ceilings. “Biophilic designs,” meanwhile, focus on bringing the outdoors in, whether that’s through the structure of the building or in other ways to mimic nature and leverage nature’s bounty.
Luxury outdoor space is in demand, such as a screened-in back porch or outdoor kitchen—both ideal for entertaining. Pools, fire pits with built-in benches, and more may be of interest. Today, more homeowners are opting for metal roofs—they’re environmentally friendly, 100% recyclable, and they typically are made from 25% recycled materials.
As far as interior design, browns are back: all shades of brown, which work in tandem with another hot design trend—incorporating elements of nature indoors. Tactile textures and vintage items are both trending. With high tech, sustainable designs are likely to be in demand today as well as in the near future.
Comparing Construction Companies
First, you’ll need to choose a builder and then present the lender with specific plans for the home before applying for a construction loan. These will include blueprints, a detailed cost estimate for the home’s construction, and a contract with your builder that lists how much you’ll be charged for construction.
Are you planning to buy a piece of property at the same time? First, you’ll need to submit the purchase agreement for that land. If you buy a lot that the general contractor owns, that may streamline the number of documents you’ll collect, and the builder may simply include the lot price in your cost estimate.
To find the right builder, be sure to reach out to friends and family members who have used a contractor (preferably to build a new home and renovations). Some questions to consider asking them: if they were satisfied with the work done, if they met deadlines according to the timetable, and if the person and company were easy to work with, along with other questions you may have. You can also check your Better Business Bureau (BBB) and reviews online or in social media groups, and through this process, create a list of potential contractors.
Here’s a helpful list of criteria for your contractor vetting process:
- Their availability
- If they build in your community of choice
- If they build the type of home you want
- If they’re licensed, bonded and insured
- How they choose and pay subcontractors
- How effectively they’re able to get building supplies right now
Once you’ve chosen your finalists, verify their licenses, check references, and their Better Business Bureau status.
Through this process, you’ll end up with your general contractor of choice and the documentation that you’ll need to actually apply for your construction loan.
First, check if a lender offers construction loans to a homebuyer. If so, find out if the loans are construction to permanent. (Yes to both at SCCU! Our construction loans come with just one set of documents and closing costs.) Other issues to explore and compare include the following:
- Construction loan rates: Get both the interest rates and annual percentage rates (APRs); the latter is a better apples-to-apples comparison between lenders because it also takes into account any lender fees and other costs of borrowing funds.
- Choice of loan programs: These may include fixed and adjustable-rate options (note: although lenders typically offer a variable rate during the construction process, SCCU offers both fixed- and adjustable-rate options when you convert to post-construction financing).
- Terms: Find out what they are for the construction period, and, if applicable, for the “permanent” part of the loan.
- Down payment and closing costs: Many times, 20% of the home’s value is required for a down payment. SCCU will finance up to 90% of the value.16
Be sure to get an estimate of what the principal and interest payment will likely be for the permanent portion of the home construction loans and find out about insurances required.
After you’ve narrowed down your lender choices to the best construction loans in Florida for you, it’s time to find out their specific qualification requirements, and if acceptable, to apply.