Assuming that you will need a loan to build your new home, it is important to first determine two things:
- The maximum loan amount you qualify for.
- The largest monthly payment you are comfortable with.
The answers to these two questions will determine your maximum construction budget.
In order to determine the maximum loan amount you qualify for, a potential lender considers your credit score, income and debt. Credit scores are referred to as your FICO Score. FICO Scores range between 300 and 850. Higher is better. Your FICO score is determined by your payment history, amount owed, length of credit history, new credit, and types of credit used. Generally speaking, lenders want your credit score to be 660 or higher to be considered for a loan. Lending requirements vary among lenders. The Federal Government has a free publication, "Your Credit Score". In it you will learn why your credit score matters, what good and bad scores are, the elements of your FICO credit score, and how to raise your score. With regard to income and debt, most lenders do not want your total monthly debt (including your house payment) to exceed 38-42% of your gross (pre-tax) monthly income. This percentage can vary depending upon your FICO score and amount of your equity in the project. The best way to sort this all out is by speaking with your local Pacific Modern Homes, Inc. (PMHI) dealer. They can refer you to the best lenders for your project. Keep in mind, to build a new home actually requires two loans, the construction loan and the long term loan (or conventional mortgage) that replaces the construction loan after the construction is completed. In many ways, the construction loan is the most important since it must be structured in such a way to conveniently pay the construction bills as your home progresses. Hence, the importance of using an experienced "new construction" lender that will also "bundle" the construction and long term loans. It is also important to consider the maximum loan payment you will be comfortable making. Many are happy with whatever amount their lender decides to loan them. Others have a certain amount of their budget they want to have left over each month for other priorities, such as travel or new furniture.
Another aspect of the construction lending process is to determine the anticipated value of the completed project. This is an important part of the construction lending process because, in general, the lender will loan about 80% of the appraised value of the completed project, including the land costs. For construction lending purposes, the Appraiser uses the building plans to arrive at the anticipated value. As you can imagine, one could have spent thousands of dollars to get to this point and it would be nice to have an idea of the anticipated value before spending any money. We suggest one consult either a Real Estate Agent or "www.zillow.com to determine anticipated value before spending any money. This is not the same as an appraisal, but it's useful in evaluating the overall project. Note: This is of particular importance if the home values in the area you’re considering have dropped in recent years.
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