Preparing to Finance Your New Home

Buying a new home requires a great deal of preparation. While home buyers typically look first at price, newly-constructed homes often offer better value. Most first-time buyers require financing, so buyers should consider certain key factors.

Why Should You Buy a New Home?

Banks typically approve mortgages for newly constructed homes with less trepidation. Many lenders balk at offering home finance for fixer-uppers, which can become money pits. Besides being more palatable to mortgage providers, buying new offers other advantages.

Today’s contractors build new homes with energy efficiency in mind. Older homes are more expensive to heat or cool and often require considerable maintenance. Besides cost, newly built homes allow homeowners to customize their homes.

Know Your Credit Worthiness

Before approaching a lender regarding new home finance, buyers should look at their credit scores. Ensuring all information is correct and up to date will prevent nasty surprises. Consumers should approach the main credit bureaus – Equifax, Experian and Trans Union – to check credit scores. These will determine the terms lenders offer to finance new homes.

Lenders will need to see documentation of income, employment, retirement funds and other assets. For the self-employed, banks also require two years of IRS tax records. It makes sense to prepare these things before looking into home finance options. Additionally, buyers should estimate their living expenses to determine what they can afford to borrow.

Consider Construction Loans

While borrowers look mainly at long-term mortgages, construction loans may make more sense for new home finance. Used primarily by contractors building custom-made homes, they provide home finance for construction and close after six to twelve months.

They can convert automatically into long-term loans – single-closing loans – or close once construction finishes – two-closing loans. While the latter option costs more, it provides a bridge should construction costs go over budget. As borrowers use these primarily for new construction, fewer lenders offer them. For buyers considering this route, community banks usually offer the best terms.

Types of Loans to Finance New Homes

Your LTV plays a critical role in determining your qualifications for Private Mortgage Insurance (PMI). The PMI will cushion the lender from any default. It will transfer part of the loan risk to a particular mortgage insurer.

Five basic types of mortgage exist to finance new homes. They are:

  • Adjustable-rate
  • Conventional
  • Fixed-rate
  • Government-insured
  • Jumbo

Adjustable-rate mortgages (ARMs)

ARMs usually keep the same rate for the first few years. While ARMs save buyers money on interest, payments may become unaffordable should rates rise. Should home values fall, it also hurts homeowners’ ability to refinance.

Conventional Loans

Homes not insured by the federal government – known as conventional loans – offer various advantages. Available for primary homes, secondary homes or investment properties, they tend to offer lower borrowing costs. They require lower downpayments if backed by Fannie Mae or Freddie Mac. However, they require more documentation, higher credit scores and a lower debt-to-income ratio.

Fixed-rate mortgages

Fixed-rate mortgages keep payments the same over the life of the loan, allowing buyers to budget better. These tend to charge higher interest rates, and it takes longer to build equity.

Government Insured Mortgages

Backed by the FHA, VA or USDA, government-insured mortgages provide government guarantees for lenders. They typically allow for lower down payments and credit scores but require more documentation and higher borrowing costs.

Jumbo Mortgages

Affluent buyers tend towards jumbo mortgages, which normally require substantial down payments, outstanding credit and high income. While allowing buyers to obtain home finance in high-cost areas, they require significant asset liquidity, higher down payments and better credit scores.

Grand Homes Offers More

When new home buyers finance the building of their dream homes, they should always work with someone they can trust. For those considering a new home in the Dallas-Fort Worth metro, hiring a competent, experienced team like Grand Homes can make all the difference.