Financing New Home Construction

Financing new home construction is the one of the driving forces of the home construction industry. Financing new home construction helps buyers build the home of their dream on the property of their choosing. While financing new home construction was fairly simple in the early 21st century, the banking collapse of 2008 has put this segment of the loan market into deep freeze.

Methods for financing new home construction have been available for decades from banks and credit unions for eligible customers with good credit and an amount of equity to put down that was established by the bank. The bank would then pay the home builder the money to build the house, and the customer would repay the loan at a certain interest rate over a period of time. In order to establish how much money was needed, an appraiser would be used to determine the value of the house after it was built, how it would be constructed, what materials used, the cost of materials, the cost of the work done, the cost of the land and the price of plans and permits.

In more recent years, banks and credit unions have offered new types of financing for new home construction in order to draw in more customers. One new method is the adjustable rate mortgage, where the amount paid by the customer varies from month to month as the interest rate changes. This can be an attractive option when interest rates are low; when they jump, however, these kinds of mortgages can force customers to refinance or give up their homes.

Other mortgages were sub-prime mortgages, where the customer had a less than stellar credit rating but the banks took a chance in financing them at higher interest rates. The banks also lowered the amount of collateral needed to obtain financing new home construction; some, in exchange for another higher rate, were offering to finance the loan with no money down.

After millions of sub-prime mortgage holders and those with less equity defaulted on their loans, banks around the country found themselves in serious financial trouble. Though most of the banks now find themselves on more solid footing, the cost and equity needed for a customer to obtain financing for new home construction is a great deal more than it was just a few years ago.

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