How to Finance Construction

There are two easy ways to finance the building of a home in Virginia (besides paying cash out of pocket).

There are many options for financing construction. However, there are two main ways we see as being the most favorable for most of our customers.

The first way is to use a Coperm loan and do the financing yourself. The other common approach is to have our firm handle all of the land and construction financing internally utilizing our credit lines.

Coperm Loan

Let’s take a look at the option of using a Coperm loan. This stands for “construction to permanent” and is also referred to as a C/P loan. These are loans that are designed to cover the purchase of the land, the construction of the project, and the permanent mortgage in one loan product. This may be one closing (with long rate locks), or a multiple closing situation with a construction loan and a permanent loan involved.

The advantages here may be the ability to lock in rates for a long period of time (12 months is common). However, in recent years, banks have become very tight in their lending standards and the down payment required for coperm loans can be an issue (ranging from 10-20%) for some customers. These loans also are more complex compared to other alternatives.

However, the terms of these loans tend to be a little unfavorable compared to a standard mortgage (maybe rates, points, etc…). This loan product is very commonly used when a customer already has the land in their name as it allows them to retain possession of the land and to use equity in the land as a down payment. The C/P approach is a legitimate option for many customers.

Financing Through Blue Ridge Custom Homes

For many customers, they prefer to have us finance the lot and the construction and they only want to get a typical mortgage at the end of the process like a normal (existing) home purchase

Blue Ridge Custom Homes LLC is set up with credit lines for the purpose of buying land and financing construction projects. We can handle the land purchase, the construction financing, and all you have to do is make sure that the mortgage is in place when the project is complete.

The advantages to this approach are found in the fact that the down payment is typically only 5%, a customer does not have to deal with any land purchase or construction financing, we deal with making the monthly interest payments that are going to exist in any loan situatoin, and the mortgage only needs to be put into place at the end of the project, when the house is complete. Thus, many choose this option for its simplicity. Also, this approach allows a customer to really use any loan product they wish as it is really the same as buying an existing home from a mortgage company’s perspective.

Unlike the long rate locks on a C/P loan, the rate will get locked at the end of the process, so for folks who are worried about rates going up during the construction process, this can be a disadvantage to this approach.

Cost Considerations

The cost to you, the customer, will be very similar regardless of how we do it. There are typically slightly fewer closing costs in a coperm situation due the advantage of one closing. With coperm loans, your bank will require that you make monthly payment on interest only on the balance of the amount you have borrowed (which gets progressively larger as the project matures). These payments also exist if we finance the project but will be paid by us and built into the cost of the home rather than existing in the form of monthly payments to your lender that come direct from you.

Typically, a customer selects an approach to financing based on features outside of cost. For example, perhaps they don’t qualify for a C/P loan without selling their existing home and they want to stay in the home while we build. So, we end up financing the build. Or, they like the long rate lock on a C/P loan.

We are very flexible and can find a way to do virtually any project that makes financial sense. Our goal is to learn enough about your specific situation to help you decide which approach is best for you.

Time Considerations

We don’t have to decide the financing option from the start. We want this decision to be made before the land is purchased. At that stage, we need to know who is buying it, us or you. So, there is usually time to figure it out. We can refer you to some top quality lenders to help explore the details on your options.

Contact us to learn more about this or other topics you wish to discuss.

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