To Build or Not to Build, That is the Question! – Part I
When making a decision about purchasing your next residence, have you ever been conflicted over whether you should build a new home or purchase a new or pre-owned home? Either of these options provide for a unique opportunity as you consider your next home. Below are a few thoughts which you may wish to consider as you make your next home buying decision.
1. Do you currently own a home? For most people choosing a new home, this will require that their existing home be sold for two reasons: 1.) In order to obtain the existing equity which will be applied to the new home and 2.) To reduce the overall indebtedness in order to qualify for a new mortgage. Most people are not able to afford carrying two home mortgages at the same time, especially now under the new ATR/QM (Ability to Repay/Qualified Mortgage) rules limiting the back-end ratio (all debt payments) to 34% of gross income.
2. It is best to first visit with your lender to get pre-qualified. This will enable you to understand what price range to consider and what your next step should be.
3. Will you need to sell your home first, or do you wish to apply for a bridge loan? Your lender will be able to assist you with this decision, as it will directly affect your ability to qualify for a construction loan or a purchase money mortgage loan. Bridge loans represent short term financing (6 to 12 months), generally against the equity in your existing home which enables you to proceed with the construction or purchase of the new home.
- The bridge loan will be repaid upon the sale of your existing home.
- If your existing home is free and clear, this will be a straightforward 1st lien mortgage on your existing home.
- If your existing home still has a mortgage balance, generally the lender will either look at taking a 2nd lien mortgage behind the existing mortgage balance or the lender will roll the existing mortgage into the new bridge loan, thereby eliminating the previous mortgage payment until the home is sold.
- Either way, your lender will ultimately be required to qualify you as to your ability to carry two mortgages at once – the bridge loan and your new construction loan or purchase money mortgage loan.
- Some borrowers will not be able to qualify for the additional bridge loan and must therefore plan to sell their existing home first.
4. Assuming this decision has now been made, considerations for either building or buying include:
- Do you want to totally design your next home or will standard available floor plans meet your needs? These can be either existing pre-owned homes or newly pre-built homes.
- Do you want to start all over on landscaping or would you prefer to purchase a home with existing and mature landscaping?
- Do you want to purchase in a newly developed subdivision or would you prefer to live in an existing mature subdivision?
- Are you willing to purchase a pre-owned home and possibly perform some remodeling in order to enable the home to meet your needs or tastes?
- If planning to remodel, will the scale of any remodeling plans allow you to move in while the home is being remodeled or will you still need to find temporary housing until the remodel is completed?
- What are your time constraints, how quickly do you need to find and move into your next home? Building a new home will generally take from 6 to 9 months to complete. In this case, you may need to hold off selling your existing home or you may need to find temporary housing, i.e. rent housing until construction is completed.
- What are your family's needs and considerations in regards to your proposed move? Is temporary housing even an option?
5. Many people start out looking for an existing home and decide to build only after they have been unable to find exactly what they want or need in a pre-owned home.
6. If you elect to purchase a pre-owned home, your best results may be obtained by using the services of a local realtor to aid in the search. There are many excellent realtors available and you should spend time finding a realtor who you are comfortable with and who deals in residential property of the size and in the price range you are looking for.
In cases where you find a new pre-built home being sold by the builder, you will generally deal either directly with the builder or through a realtor who is listing/selling the property.
7. Assuming you finally elect to design and have your new home built, your first decision will be to select your builder. This will most likely be the most important decision you make in the construction process. Make sure you check out your proposed builder:
- What type of homes do they build?
- How long have they been building?
- If you do not already own your lot, do they have available lots or access to available lots?
- Check out references from some of their previous homebuyers. How is their follow-up and, how easy was the builder to work with? Have previous homebuyers been happy with the quality of their home after having lived in it for a period of time?
- Does this builder have existing plans that meet your needs? Will the builder allow you to make modifications to suit your needs, or will this builder agree to build from plans you may have purchased elsewhere?
With your builder selected and your plans determined, it will now be time to arrange for your financing. I will discuss the items you will need to consider for interim construction financing in my next segment.