Buying and selling a home at the same time may seem like a logistical nightmare for many consumers, but building a new custom home before selling might seem like a leap of faith. However, with preparation, the process can actually be very manageable. While there is always some degree of risk with any real estate transaction, people successfully begin building their dream home prior to listing their existing home every day. Proper planning and financing are important steps in the process. However, one of the most important things to do is partner with a reputable custom home builder.
Evaluate Your Situation
Before you can commit to building a new home, you will need to sit down and evaluate your financial and living situation. During the process, you should consider whether selling your existing home is necessary to finance all or part of the new construction. When considering your options, be sure to think about these questions:
- Will I need two mortgages? If so, how long can I afford multiple monthly payments?
- Do I have funds for a 20% to 25% down payment on a construction loan?
- Is my debt-to-income (DTI) ratio strong enough to qualify for financing with my existing mortgage?
- If I decide to sell my home before construction is complete, where will I live?
Seeking A Construction Loan
Financing the build of a new custom home is a bit different than financing a traditional mortgage. Consumers must seek out a construction loan, also known as a self-build loan. These loans typically have a maximum term of one year and cover the construction costs associated with building your custom home. After the construction is finished, many consumers refinance their construction loan into a traditional mortgage.
Similar to a mortgage, acquiring a construction loan presents two major challenges. Lenders usually require a minimum down payment of 20%. Some lenders may even require 25%, as construction loans are generally viewed as riskier than mortgages. Lenders will also require a good debt-to-income (DTI) ratio in order to qualify, so the balance on your current mortgage does matter here. The more home equity you have, the better chance you’ll be able to secure financing at a decent rate. On average, lenders like to see a DTI < 32%, though exact criteria varies.
Keep in mind, in order to secure a construction loan, many lenders want to be sure you’re working with a reliable builder like Atlas Homes. As a result, the reputation and experience of your building partner plays a large role in securing financing.
Other Financing Options
Many consumers want to stay in their current home while building a new one. However, obtaining the cash for a down payment before selling your existing home can be a challenge for some. If you need cash for your down payment, there are a few financing options you can consider before selling your home. However, to qualify, you’ll need to have a strong DTI ratio.
- Consider A Bridge Loan
A bridge loan is a short-term loan used to fund the purchase of a new property before a homeowner has sold their existing one. Bridge loans typically have high-interest rates and are usually backed against your existing real estate. In other words, you’re borrowing against the equity of your current home to fund the down payment on your new home.
- Explore A Home Equity Line Of Credit
If you have a significant amount of equity in your existing property, you might be eligible for a home equity line of credit (HELOC). This type of loan allows you to borrow against your existing home equity. HELOCs generally have lower rates and more favorable terms than bridge loans.
- Borrow Against Your 401K
Consumers can borrow against the balance of your 401K but will be required to repay it within a certain time in order to avoid taxes or penalties. Repayments also must be made with interest.
Do I Have To Sell My Home Before I Build?
No, in most cases, consumers begin to build their new custom home before selling their existing one. If you have enough cash for a down payment on the new construction, your existing mortgage is paid off, or you don’t mind paying two mortgages at once, then there is no need to sell before you build. If you’re able to obtain cash for a down payment through other financing options, you won’t need to sell your home first.
What If I Need To Sell My Home First?
In some cases, consumers aren’t able to obtain the necessary financing or funding without selling their existing property first. If this is the case, it might make sense to try to sell your home if you have established a significant amount of equity.
Renting a home or apartment between the sale of your existing home and the completion of your new build can be an option that provides some flexibility. Many apartments offer a 6 to 12-month lease, and some may even allow you to rent month-to-month. Taking this approach would allow you to free up capital for a down payment while decreasing your debt-to-income ratio, which could ultimately help you achieve better rates for your new property.
Coordinating the build of a new custom home does come with a few challenges, but getting your finances in order and selecting the right builder will help make the road a lot smoother. Regardless of your path, your builder should be able to help review financing options and guide you through the process.
If you’re planning to build a new custom home in the DeLand, Florida area, contact us at Atlas Homes today. Our team of experts will work closely with you to design the perfect home, review financing options, create a realistic timeline for completion.