Building your own home can be a great opportunity for first time buyers, but it can also be challenging. Before you commit to a builder, you should do your research.
Look for a builder that has a track record of satisfied customers and communicates with them after closing. You should also ask about any financial incentives they offer to first time homebuyers.
Construction-only loans
First time home buyers can build a new house by using a construction-only loan to finance the construction phase. These short-term loans usually cover the building period only, and once construction is complete they’re typically converted into a permanent mortgage or paid off with cash.
These loans are often available from many different lenders, so it’s a good idea to shop around before you apply for one. The right lender will take into account your credit score, down payment and home building goals when evaluating your application.
Unlike a conventional mortgage, which makes a lump-sum payment when you close, construction loans disburse money through a series of draws that happen as your project progresses. These draws are used to fund contractors and pay for construction costs.
Down payment assistance
One of the biggest obstacles to buying a home is the need to save up enough money for a down payment. Fortunately, down payment assistance is available from both government agencies and nonprofit organizations.
State and local programs often offer second mortgages or matched savings accounts that are tailored to certain groups. These loans come at a low interest rate and can be forgivable if you make 36 consecutive, on-time payments.
In addition to these programs, first time home buyers may qualify for mortgage loans that are backed by the Federal Housing Association (FHA) or the Department of Housing and Urban Development (HUD). These types of loans require a down payment, and they also allow you to use gifted money or down payment assistance as a down payment.
Construction-to-permanent mortgages
Construction-to-permanent mortgages allow first time home buyers to build a house on a lot, or renovate an existing one. These loans are available through a variety of lenders, and you can shop around for the best rates.
A construction-to-permanent loan can be a great option for many first time home buyers, but it does come with its own pros and cons. Some disadvantages include higher interest rates, more paperwork and a steep down payment requirement.
A construction-to-permanent mortgage usually starts out as a separate, short-term loan and then converts to a permanent mortgage after the property is completed. Lenders will also typically include a cost buffer in the mortgage amount to cover unanticipated project expenses that aren’t included in the initial estimate.
Government-backed loans
If you want to build or purchase a home but don’t have the cash for a down payment, government-backed loans can help. These programs are backed by the Federal Housing Administration, Department of Veterans Affairs or United States Department of Agriculture and are available through approved mortgage lenders across the country.
FHA loans are popular among first time home buyers who don’t have a high credit score or low income because they allow down payments as low as 3.5%. USDA loans are also available for those buying homes in rural areas with lower interest rates and insurance payments.
Getting pre-approved for a mortgage loan is the first step to purchasing a home. Our mortgage preparedness e-book covers the steps involved in this process. You’ll also learn about down payment assistance and closing cost assistance that are available to first time home buyers in certain areas.
Employer-sponsored programs
While many employers offer perks such as company health insurance and a 401k plan, there are many that have recognized the value of assisting employees in buying homes. These include employer-assisted housing programs, which can help first time home buyers cover down payment and closing costs.
Depending on your state, these programs can be offered by the local or federal government and often include down payment assistance (DPA) grants that don’t have to be paid back.
EAH programs can also provide employees with training and credit counseling. In addition, some large companies have employee credit unions, which can offer lower interest rates and better terms than conventional banks.
