Tips for Working with Borrowers Building Custom Homes
Although people who build their own custom homes are less common than other kinds of borrowers, mortgage brokers and loan originators are bound to come across a few. Here’s some sound advice you can give to clients who are thinking of building custom homes.
Stress the Importance of Pre-Approval
The best first step for a borrower seeking financing for any home is to speak with a lending expert to get an idea of how much they’ll be able to borrow. In the case of custom construction, this step is even more important since the loan will likely differ from a mortgage product for purchasing an existing home. Loan originators can help borrowers navigate the requirements of construction loans and offer a good estimate for the home’s budget through the pre-approval process.
Find a Builder Before Land
While looking for a plot of land might seem logical when building a custom home, finding a professional builder is usually a better way to start the process. Builders understand the often complicated task of acquiring land, and usually have trusted architects that they work with. And borrowers might consider the more common route of buying a semi-custom home that a builder has planned. A good loan officer should know some good builders to recommend and advise their clients to speak with a few of them before making their choice.
Expect a Bigger Budget
Any kind of home construction, and especially custom and semi-custom construction, is almost bound to come with cost overruns. This may be even more true these days, with supply chain issues driving up the costs of building materials, fuel, and contributing to an overall increase in inflation. According to 2020 U.S. Census data, it takes an average of nearly seven months to build a privately owned residence, and owner-built homes take an average of twelve months to build from start to finish. The prices one sees when construction starts are unlikely to be the same when construction finishes. And so borrowers would be wise to plan for construction costs to go between 10% to 20% over budget.
Check Out Your Credit
As loans for building custom homes often come with higher requirements than other types of mortgage loans, brokers should advise clients to check out their credit scores at the start. For example, construction-to-permanent financing through Fannie Mae usually requires a credit score of 700 or higher with stricter loan-to-value (LTV) ratio requirements than other types of loans.
From serving clients who are building custom homes to homebuyers looking to finance existing ones, Luxury Mortgage Wholesale is here with a wide array of financing options. Contact us today.