It might just be a lot easier than you think to get the money you need to finance your home-building dream. In this article, I identify seven financing strategies, and I know that at least one can work for you.
Don’t let that dream die! Building your own home is one of the most exciting, and noble endeavors anyone could ever attempt. I want to encourage you to explore all the ways that you can make this happen for you. The money necessary to take you from dreaming and scheming to planning and doing is waiting for you.
Which approach is right for you?
1) Your local banker:
Your local banker is there to make money. He makes money by making loans. He sees a brand new home as a great investment for you, and for him. Yet, this won’t work in every case. Here’s what you need to ask:
Find out if he makes construction loans to owner builders. Ask him how much down payment is required and if you need to own the building parcel free and clear of any loans. Be sure to also ask him if a General Contractor is required.
2) A mortgage broker:
This can be a great option. A few of them will specialize in construction loans. A mortgage broker usually has more options available than a bank and you can learn a lot from a good broker. Be sure to ask her the same questions you would ask your banker.
She can arrange for the money for you from “institutional” sources (like bankers do) or she can find private lenders. Private lenders will usually cost you a little bit more but it is often well worth it. You should definitely consider this option and compare.
3) Rich Uncle:
I’m never surprised to find this option working for some people. No, it doesn’t have to be Uncle Bob, it can be any family member or friend. Be sure to keep it a business transaction. And it needs to be profitable for the “investor”.
You’ll usually save money on fees when you borrow this way but don’t expect it to be free. You’ll want to make it official. Using a real estate attorney would be a good way to draw up the papers correctly. Done right, it’s a great deal for you and a great investment for him or her!
4) Home equity line of credit on your current home:
You’ll have to check the laws of your local area but this works very well for many people. Your existing home will usually have to be free and clear to have enough value to fund a construction project or you’ll likely have to add cash yourself.
This type of loan is probably the least expensive to set up and the easiest to access during construction. If you’re in the position to do it this way, it is probably the way to go. Again, check the laws, then check with your banker to set it up.
5) Borrowing against your investment portfolio:
You’ll need a substantial investment fund to pull this off. But, if you have it, it usually makes sense to borrow against it rather than sell it to fund your home building. This way you’ll keep your growing assets in tact and add another!
Naturally, you’ll want to get expert advice first. You don’t want to borrow against investments that are losing value. (Why would you even want to keep these?) With this option, the fees are low and the loan can be paid off at the completion of your home with a regular mortgage.
6) The Pay-as-you-go construction “loan”:
Right, this is not a loan! But it is a way of funding your project. I’m not in favor of it though. However, if you want to do this, don’t neglect setting out a very clear plan for the money and the time it will take. If you can’t finish in two years, (3 maximum) I wouldn’t do it, period.
7) Packaged, panelized, kit homes with financing:
This might just be your best option but you’ll have to do a lot of research on this one. There are kit home/panelized home packages all over. Some are good and some not-so-good. Most offer financing options with the purchase of your home package. Please see other articles and e-books on this topic.