Mortgage financing for new construction homes can be more complex than a typical mortgage. It can also have higher fees.

A good mortgage lender can help you navigate the process and find a loan option that suits your financial needs. The right company will give you undivided attention and take the time to understand your situation.

Construction Loans

Acquiring an existing home stands as a viable choice for potential homeowners, yet numerous individuals favor the prospect of settling into a freshly built residence. This inclination could stem from the ease of tailoring a dwelling precisely to personal preferences or the preference for a property free of any known issues. Regardless of the rationale, various financing avenues exist to transform the aspiration of owning a new construction home into a reality.

Securing a loan to purchase a new construction property mandates meeting specific criteria. Prospective buyers must fulfill prerequisites such as maintaining a high credit score and sustaining a favorable debt-to-income ratio. Additionally, they need to allocate funds for a down payment and cover associated closing costs. While certain lenders may offer the option of a lower down payment for new construction homes, most typically necessitate a minimum of 5% of the purchase price. Individuals considering the purchase of a new construction property might find it advantageous to explore the option of preapproval for a mortgage, enabling them to gauge a realistic estimate of their affordability for the property. 

Some borrowers may choose to work with the builder’s preferred lender, which can be beneficial for several reasons. These lenders can offer loans with a shorter closing timeline, they are familiar with the builder’s process and the needs of new construction homes, and they may even offer discounted rates or reduced closing costs.

Before closing on a new construction home, the lender will perform a final inspection and issue a Certificate of Occupancy (CO). This document indicates that the home has been completed by local building codes and is ready for occupancy. It is usually performed by a local inspector after a walkthrough of the property by the builder.

Obtaining a construction loan can be more challenging compared to qualifying for a traditional mortgage. This is because banks assume a higher level of risk when lending money for a property that is yet to be built. It is crucial for prospective borrowers to carefully review their credit history, obtain preapproval for a mortgage, and save up for a down payment. These steps will help increase the chances of qualifying for a construction loan. When purchasing a new construction home, it is advisable to collaborate with a trustworthy mortgage lender who can provide guidance and offer specialized loan programs tailored for such properties.

For example, if you’re planning to build a new single-family home on a vacant lot in Ballston-Virginia Square, you can find a construction loan with a minimum down payment of 20 percent. Moreover, the lender offers low interest rates and no prepayment penalties. The borrower can also finance up to 65% of the land and construction costs.

The lender will perform a credit check and a property appraisal to determine whether the property is suitable for a construction loan. It will also consider other factors such as location, the developer’s experience, and a realistic estimate of the cost of construction. Depending on these and other criteria, the lender may decline your application or approve it with conditions.

If you change jobs before you start building a new home, it could negatively affect your credit. This is because lenders will review your previous work history to determine how reliable you are. It is best to wait until you have secured the necessary loan before changing jobs.

Because building a new home takes a lot of time and effort, it is important to use a reputable real estate agent who can help you select a quality builder. In addition to recommending reputable builders, your real estate agent can negotiate with developers to get a good deal on homes.

Another way to save money on a new construction home is to buy a spec house. These are houses that the builder sells to a limited number of buyers. They can be less expensive than custom homes because they don’t include all the customizations that you might want in your own home.

Lastly, you can apply for the SPARC program, which is available to eligible Arlington residents. This program provides a 1% rate reduction on Virginia Housing mortgages for first-time homebuyers who meet the income and eligibility requirements. This is a great option for first-time buyers who are interested in new construction in Arlington.

Multifamily Mortgages

For investors interested in purchasing a multifamily property to rent as a rental apartment, several financing options are available. One option is a conventional multifamily mortgage from lenders such as banks, CMBS lenders, and Fannie Mae. This type of financing offers loan terms ranging from 5 to 30 years. It is especially suitable for investors looking to purchase or refinance two- to four-unit residential properties. It also allows borrowers to obtain financing to repair the property.

Investors can also use a short-term multifamily loan, which is often best suited for fix-and-flip investors who need fast access to capital to purchase and rehab a property. This type of loan usually has a shorter term than traditional mortgages, and the qualification requirements tend to be less strict. It is important to remember, however, that the interest rates on these loans are typically higher than those on traditional mortgages.

Regardless of which type of financing is chosen, the borrower will need to meet certain criteria to qualify. Generally, the lender will consider the borrower’s creditworthiness and income. They will look at the borrower’s monthly debt payments (car, student, and home loans) as well as their minimum payments on revolving lines of credit. They will then compare this information to the borrower’s income to determine if it is sufficient for them to afford a mortgage payment on a new rental property.

In most cases, a down payment will be required for multifamily investment properties. The amount of the down payment will vary depending on the specific financing type. For example, a conventional multifamily loan may require a 20 percent down payment. In contrast, a bridge loan may only require 10 percent of the property value.

Many types of multifamily mortgages have more flexible financing requirements than those on single-family homes. This is because the risk of investing in a multifamily property is seen as lower by lenders than it is for other commercial real estate assets. For this reason, many of these loans allow borrowers to take out financing with a higher Loan-to-Value ratio than loans on single-family properties.

Commercial Mortgages

Knowing your financing choices is crucial if you're thinking about buying a commercial property in the Washington, D.C., area. Specialized loans called commercial mortgages are used to pay for the building of new structures or significant remodeling projects. Usually, these loans have a brief repayment period and require interest-only payments while being built. Banks, credit unions, and life insurance firms can offer them.

TEG Federal Credit Union is a valuable local resource for commercial real estate loans in Virginia. The lender specializes in financing business investment properties, such as 1-4 family units of residential rental homes; office, warehouse, and industrial buildings; and retail properties. The lender also offers a land loan program, which provides financing for the purchase of raw land.

For instance, Eloise is keen to purchase a piece of property in Arlington's Handley neighborhood so that she can construct a duplex and then sell it for a profit. Although the construction expenditures are anticipated to be around $150,000, she hopes to make even on the investment by selling the house for roughly $320,000. With a new construction house loan from West Star Lending Group, Eloise could be able to cover her building expenses with draws that are paid out at specific construction milestones. Everyone engaged in the loan process will find it easier with this flexible draw schedule, and the borrower/builder will be able to avoid prepayment penalties.

One of the biggest benefits of this type of loan is that it combines the construction and permanent mortgage into one package, reducing the number of closings and fees involved in the transaction. In addition, the permanent mortgage rate is locked before construction begins, ensuring that you know exactly what your future monthly payments will be.

The lender will also scrutinize your financials to ensure that you can afford the mortgage payments during construction. This will include looking at your debt-service coverage ratio and evaluating your net worth to loan size ratio. The lender may also want to see proof that you’ve saved sufficient funds to cover the down payment and closing costs on the property.