Buying a new home and having it built from the ground up is an exciting process, but it also raises practical questions around financing. One of the most common is whether or not you need to make mortgage payments before you can move into the completed home.
If you’re short on time, here’s a quick answer to your question: In most cases, yes you do need to make mortgage payments on a house that is still being built. Even though you cannot yet live in the home, the loan to pay for land and construction needs to be repaid on schedule according to your mortgage agreement.
In this comprehensive guide, we’ll explain in detail how mortgages work on new construction homes. We’ll cover when payments start, if you can get extensions, how interest rates factor in, and tips to make the financing process smoother.
New Construction Loans Are Usually Pre-Qualified or Pre-Approved
When it comes to financing the construction of a new home, it is important to understand how the loan process works. One common question that arises is whether or not you need to pay a mortgage while your house is being built.
The answer to this question depends on the type of loan you obtain and the terms of the loan agreement.
Get Pre-Qualified Early On
Before embarking on your home construction journey, it is advisable to get pre-qualified for a new construction loan. This will give you an idea of how much you can borrow and what your interest rates may be.
Pre-qualification involves providing your financial information to a lender who will then assess your creditworthiness and determine the loan amount you may be eligible for. Getting pre-qualified early on in the process can help you plan your budget and ensure that you have the necessary funds to cover the costs of construction.
The Pre-Approval Process
Once you have found a lender and have a clear understanding of your borrowing capacity, you can proceed with the pre-approval process. Pre-approval involves a more detailed assessment of your financial situation, including a review of your credit history and income documentation.
During this process, the lender will provide you with a specific loan amount and interest rate that you are approved for. This pre-approval letter can give you peace of mind knowing that you have secured financing for your new home construction.
Interest Rates May Be Locked
One advantage of pre-approval for new construction loans is the ability to lock in your interest rate. Interest rates can fluctuate over time, and locking in a rate can protect you from potential increases during the construction period.
This can be particularly beneficial if you anticipate a longer construction timeline. By locking in a favorable interest rate, you can potentially save money over the life of the loan.
It is worth noting that the terms and conditions of new construction loans can vary depending on the lender and the specific loan product. It is important to thoroughly review the loan agreement and consult with a financial advisor or mortgage professional to ensure you understand the terms and obligations associated with the loan.
Mortgage Payments Normally Begin Once Construction Starts
When it comes to building a house, many homeowners wonder if they have to start making mortgage payments even before the construction is completed. The good news is that in most cases, mortgage payments do not start until the construction of the house begins.
Loan Disbursements Happen Incrementally
During the construction phase, lenders generally disburse the loan amount in increments, also known as draw periods. These draw periods are typically tied to specific milestones or stages of the construction process.
For example, the lender may release funds when the foundation is completed, when the framing is finished, or when the house is fully built. This incremental disbursement ensures that the builder has the necessary funds to continue the construction process without burdening the homeowner with mortgage payments.
Payments Accrue During the Build
While homeowners are not required to make mortgage payments during the construction phase, it’s important to note that interest on the loan starts accruing from the time the loan is disbursed. This means that the homeowner will owe the accumulated interest once the construction is completed and the regular mortgage payments begin.
It’s essential to discuss the specific terms and conditions of the loan with the lender to understand how the interest will be calculated and when it will be added to the mortgage balance.
Exceptions When Payments Can Be Delayed
Although mortgage payments typically start once construction begins, there are some exceptions where payments can be delayed. For instance, some lenders offer a construction-to-permanent loan, which combines the construction loan and the mortgage into one loan.
With this type of loan, homeowners may not have to make mortgage payments until the construction is completed and they move into the house. Additionally, if the homeowner is building the house themselves, they may have the option to delay mortgage payments until the project is finished.
It’s important to consult with the lender to explore any available options for delaying mortgage payments.
Interest May Accrue Even Before Construction Begins
When building a house, it’s important to understand that interest on your mortgage loan can start accruing even before construction begins. This is because construction loans, which are typically used to finance the building process, often have a feature called “interest reserve”.
The interest reserve is a portion of the loan that is set aside specifically to cover the interest payments during the construction period.
Interest Builds Up During Construction Period
During the construction period, which can last several months or even up to a year, interest on the loan starts to accumulate. This means that you’ll start owing interest on the loan even though you haven’t moved into your new home yet.
The amount of interest that accrues will depend on the size of your loan, the interest rate, and the length of the construction period.
It’s important to note that the interest that accrues during construction is typically added to the total loan amount. This means that your loan balance will increase over time, and you’ll end up paying interest on both the original loan amount and the interest that has accumulated during construction.
Prepaying Interest Can Save Money Long-Term
One way to mitigate the impact of accruing interest during construction is to consider prepaying the interest. Some lenders may offer the option to make interest-only payments during the construction period, which can help reduce the overall interest expense.
By making these payments upfront, you can save money in the long-term by reducing the total interest paid over the life of the loan.
It’s important to discuss this option with your lender to understand the terms and conditions, as well as any potential benefits or drawbacks. Prepaying interest can be a smart financial move, but it may not always be the best option for everyone.
Additionally, it’s worth mentioning that the rules and regulations regarding construction loans may vary depending on your location and the specific lender you’re working with. It’s always a good idea to consult with a mortgage professional or financial advisor who can provide guidance tailored to your individual circumstances.
Work With Your Lender to Coordinate Timing and Payments
Building a house is an exciting process, but it can also come with financial challenges. One common concern for homeowners is whether or not they need to pay their mortgage while their house is being built.
The answer to this question depends on several factors, but working closely with your lender can help you navigate the process smoothly.
Have Open Communication Throughout the Process
When you decide to build a house, it is important to establish open and honest communication with your lender. This means keeping them informed about the progress of your construction project and any potential delays or changes in plans.
By maintaining a strong relationship with your lender, you can ensure that you are both on the same page when it comes to your mortgage payments.
It is also important to keep in mind that your lender may require certain documentation or updates throughout the construction process. This could include providing proof of insurance, building permits, or progress reports from your contractor.
By being proactive and providing the necessary information in a timely manner, you can avoid any potential issues or delays with your mortgage payments.
Ask About Grace Periods or Extensions If Needed
If you find yourself in a situation where your house is not completed on time and you are unable to move in as planned, it is important to discuss your options with your lender. Some lenders may offer a grace period or an extension on your mortgage payments during this time.
This can provide you with some financial relief while you wait for your house to be finished.
It is important to note that not all lenders offer grace periods or extensions, so it is crucial to ask about this before signing any loan agreements. Additionally, it is important to understand the terms and conditions of any grace periods or extensions that may be available to you.
This includes understanding any potential fees or penalties that may apply.
Consider Getting an Occupancy Clause
An occupancy clause is a provision that can be added to your mortgage contract. This clause allows you to delay your mortgage payments until you are able to move into your new home. This can be particularly helpful if there are unforeseen delays in the construction process.
It is important to discuss the possibility of an occupancy clause with your lender before signing any loan agreements. They can provide you with more information about the specific requirements and conditions that may apply.
Having an occupancy clause in place can provide you with peace of mind knowing that you won’t have to make mortgage payments until you are able to move into your new home.
Remember, every lender and situation is different, so it is crucial to have open and honest communication with your lender throughout the construction process. By working together, you can find a solution that works for both parties and ensures a smooth transition from construction to homeownership.
Tips for Budgeting and Planning Ahead
Factor Mortgage Payments Into Overall Budget
While your house is being built, it’s crucial to consider how you will manage your mortgage payments. Many people assume they won’t have to worry about mortgage payments until their house is complete, but that’s not always the case. It’s important to check with your lender and discuss your options.
Some lenders may require you to make interest-only payments during the construction phase, while others may allow you to defer payments until the house is finished. Understanding your lender’s requirements will help you budget effectively and prevent any financial surprises along the way.
Anticipate Moving Expenses Too
Building a house often means moving from your current residence to the new one. When budgeting for your new home, don’t forget to factor in the costs associated with moving. This includes hiring movers, renting a truck, packing supplies, and potentially temporary storage if needed.
Consider getting quotes from different moving companies and plan your moving timeline accordingly. By anticipating these expenses ahead of time, you can avoid any last-minute financial strain and ensure a smooth transition to your new home.
Have a Financial Buffer for Delays
Unfortunately, construction delays are not uncommon. They can be caused by a variety of factors, such as weather conditions, material shortages, or unexpected issues arising during the building process. It’s important to have a financial buffer to cover any unexpected costs or delays.
This could include additional rental expenses if you need to extend your lease, extra mortgage payments if construction takes longer than anticipated, or increased storage costs if you have to store your belongings for an extended period.
By planning for potential delays, you can minimize financial stress and ensure you have the necessary funds to complete your new home.
Building a new home is an investment in your future. While it may seem daunting to pay a mortgage for a home you cannot yet live in, this is typically required by lenders to begin recouping their construction loans.
To make the financing process go smoothly, research lenders thoroughly, get pre-approved, and communicate openly about timing, disbursements, and grace periods if needed. With proper planning and budgeting, you’ll be prepared to handle the payments until you get keys in hand.
The effort will pay off when you can move into your brand new dream home. With smart preparation and expert help, the construction loan process doesn’t have to be painful. You’ll be counting down the days until you can move in and make happy memories there.