New Home Construction - USDA Loan Financing

Date: May 13, 2012

Perspective homeowners considering new home construction can use a USDA Guarantee Loan to purchase the house provided the loan is being used just for the end financing and not as a construction loan.

There are two types of financing the building of a new home. Almost all large national, regional, and some smaller builders will finance the purchase of the land and the cost of building the house. This type of transaction requires that the homebuyer obtain an initial prequalified letter when ratifying the sales agreement with the builder. Once the house is getting close to completion the homebuyer will start the loan approval process with the lender in order to obtain the mortgage loan to purchase the house. For this type of transaction a USDA Guarantee Loan can be used to finance the purchase of the house.

Smaller and customer builders often do not have the financial ability to finance the construction of a property. These builders will require the homebuyer to obtain construction financing to facilitate the purchase of the land and financing the construction of the house. These builders will want to receive payment based on a draw structure in which payment is made to the builder based upon certain millstones being completed. The USDA Guarantee Loan Program technically allows for construction funding. However, there are no lenders currently supporting this program.

If the builder has their own in-house or preferred lender the builder may offer certain incentives for using that lender. Examples of special financing incentives can range from closing cost help to free upgrades such as finished basements or morning rooms. Often the builder’s in-house or preferred lenders have an affiliated marketing agreement with the builder in which a portion of the loan profit is passed on to the builder. Homebuyers considering these builder incentives should compare interest rates, 45 to 60 days prior to the scheduled settlement, to determine if the interest rate provided is competitive with the market rate. Frequently a third party mortgage lender can offer better loan terms than the in-house lender, even after taking into consideration the promotional benefit provided by working through the builders in-house lender.

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