Financing Your New Home
In the old days anyone could get a loan to buy or build a home. However, with tighter regulation on lending practices, the pendulum has swung and we are faced with new challenges when deciding to finance your home. It is important to first understand the numbers, the ratios and the facts of life we all live in today. First of all we need to understand a few dynamics that will impact your lending options. If you are buying an existing home, your options are many. Most lenders today offer the traditional 80/20 loan where they loan you 80% and you put down 20% of your own money as equity. Since the home is existing and you are making an offer on the new home, presumably at market value, the 80/20 loan option is a good way to go. However, if you plan to have your new home designed and built, the rules are different. First of all, remember back when we discussed the difference in the cost of buying versus building (see “Understanding The Market” in the paragraph above). Your lender may be willing to loan you 80% of the cost to buy a home, but what will they lend you if your home costs 35% more to build than it cost to buy? The answer is, they will loan you 80% of appraised value…….And if the appraised value is 35 % less than the cost to build, you will have to pay the difference. The bottom line is you can expect to put down more than 20% if you plan to have your home built rather than purchasing an existing home. While there are many factors that impact the out of pocket requirements, we are finding most buyers that build are having to come up with about half the cost out of their own pocket. This has created some interesting dynamics and market trends.
Alternative Financing Options
One of the great byproducts of an industrious people is the creation of new opportunity that evolves out of challenge & struggle. As it pertains to financing, a new trend is emerging for mid to high end home loans. Instead of the traditional 80/20 loan, buyers with adequate assets are electing to do an “Asset Loan”. Essentially, the lender holds your “Other Assets” as collateral instead of or in addition to the home you are buying or building. This changes the dynamics of the asset to loan challenge that exists in a market where it costs more to build than to buy. There are also different ratio requirements for the asset you collateralize (usually 60/40) and most lenders will not allow a before tax asset (like a 401K or IRA). Having said that, an Asset Loan can provide greater flexibility for those buyers wanting to borrow more money than traditional lenders are use to in a challenging market.
So What Is A Buyer To Do?
The best thing you can do when faced with a new challenge is find someone that knows more about the ins and outs than you do to guide you through the process and help you avoid the pitfalls you are likely to encounter. As it pertains to finding or building a new home, getting it financed and helping you stay sane through the process, you might want to consider calling the professionals at Modern Rustic Homes. They have been through this many times and are uniquely equipped to walk you through the buy versus build options as well as connect you with the right lender that best meets your specific loan requirements. They even have a “New Home Concierge” who is responsible for helping through the process.
To learn more, here are a few links that may be helpful: