Mortgage Loans for Building Your Home
One-Time Close Construction Loan
- Combines a long-term home loan and a construction loan with one closing.
- Both loans must close before construction begins.
- Attaches one term to the construction loan and one to the home loan.
- Mortgage is a fully amortizing loan after construction loan term ends.
- Can lower closing costs.
Two-Time Close Construction Loan
- Includes separate closings for the home loan and construction loan; which may mean higher costs.
- Only construction loan must close before construction begins.
- Refinances construction loan into home loan once construction complete.
Loans for Unimproved Land or Raw Land
- Unimproved or raw land has no added improvement — no sewers, utilities, streets, curb or gutter.
- Typically requires a higher down payment and interest rate.
- Improved land is zoned for your intended use and includes or is scheduled to get improvements.
- It can be easier to finance loans for improved land.
- Loans usually carry a 10- to 15-year term and require 20 to 50% down.
Lot Loan Tip
Use the same bank for your lot and construction loan and let them know your plan. This may incent the bank to give you credit for fees paid on your lot loan toward your construction loan.
Mortgage Loans for New Homes V.S. Existing Homes
Fixed-rate loans are available as conventional, FHA, VA and Rural Housing Development loans. The interest rate stays the same for the length of the loan (term). The most common term is 30 years. 25, 20, 15 and 10 year terms are also available. Fixed-rate loans are available for all property types.
Pros: Fixed cost, no surprises.
Cons: Must refinance if wanting to take advantage of possibly lower future interest rates.
ARMs are available as conventional, FHA and VA loans. The interest rate is fixed for a time and then varies based on a published index. For example, a 5/1 LIBOR ARM has a fixed interest rate for 5 years. Then the rate adjusts annually based on the London Interbank Offered Rate (LIBOR). Many ARM types are available for all types of properties.
Pros: May be right for you if you’re comfortable taking more risk.
Cons: Interest rate and your payment may go up when fixed period ends.
A 2-1 buydown program is a fixed-rate loan available as conventional, FHA, VA and Rural Housing Development loans. This loan “buys” the interest rate down 2% the first year and 1% the second year. It remains fixed for the remainder of the loan.
Pros: Lower interest rate for the first 2 years means lower payments those years.
Cons: The cost to buydown the interest rate will need to be paid at closing, and you will usually need to qualify at the rate paid for the remaining 28 years.
A conventional or conforming loan follows guidelines and conditions set by government-sponsored entities, such as Freddie Mac and Fannie Mae. They are not guaranteed by a government agency and can be fixed, ARM, balloons or buydown loans.
Pros: With a 20% down payment the loan will not require mortgage insurance.
Cons: Loan amount limited to $417,000.
The Utah Housing Corporation Program offers a fixed-rate loan, often at interest rates just below the market rate. Loans require a 3.5% down payment and up to 3% of closing costs be financed using the Utah Housing PLUS program.
Pros: May finance a portion of down payment and closing costs with a 2nd mortgage through Utah Housing.
Cons: Income and property price limitations.
The United States Department of Agriculture (USDA) offers 100% financing for homes in designated rural areas. Applicants must have an income no higher than 115% of the median income for the area. Available as a fixed-rate loan only.
Pros: No monthly mortgage insurance.
Cons: Restrictions on location and income level apply.
A Veterans Administration (VA) loan is offered to eligible veterans. They are guaranteed by the VA, require little or no down payment and are available as fixed-rate and ARM loans.
Pros: Requires little or no down payment; available to past and current servicemen.
Cons: Restricts who can apply.
Federal Housing Authority (FHA) loans are government-insured loans. They may enable a smaller down payment. They can be fixed, ARMs or buydown loans.
Pros: Government-insured; may require a smaller down payment; down payment can be a gift.
Cons: Loan amount restrictions apply.
A balloon loan is generally only available as a conventional loan. They amortize over a 30-year term, but are due in full at the end of the program (the length of which varies and may be as little at 7 years) either by a cash payoff, sale or refinance of the property. Balloons are available for 1 to 4 unit residences, condominiums and planned unit developments (PUDs).
Pros: Ideal for income properties.
Cons: The loan must be paid in full at the end of the program.