My personal favorite and, surprisingly, a relatively uncommon approach to home buying. Of course, the term itself does imply the need for there to exist two distinguishing characteristics of the home you are considering for this purchase type to be attractive: there needs to be “newness” and “construction” of some sort. In many cases, what is commonly misconstrued for “new construction financing” is really just a traditional mortgage in “developers clothing”. If you are purchasing a home in a development, you are more than likely leveraging a traditional mortgage for the purchase of the home once your home is ready to be delivered by the builder. Most reputable builders who are offering homes in a development are absorbing the cost of construction on your home while it is being built.
A true construction loan, or new construction financing, involves borrowing money to purchase “real” property (aka “a lot”) and finance the construction of the dwelling, itself. In most cases, the process is what is referred to as a “two-close” transaction. The borrower will “close” on the first loan to purchase the property and procure funding to build the home. For the “second close”, the borrower is financing the costs of the property AND the dwelling in one, longer term loan. Construction financing is not something every mortgage loan officer or lender has experience with, or even the ability to underwrite. Make sure you are talking with an experienced construction financing expert who can explain the costs and the lending process in detail.