Throughout most of 2013, we’ve seen continually strong interest in one type of Chicago real estate: new construction property. Many buyers are in search of brand-new homes or condos or those that are only a few years old.
Rather than hunt the new construction market (with its limited inventory) for the just-right property, buyers may opt to start from scratch and work with an architect and contractor to build the home of their dreams, as reported in a recent article in the Wall St. Journal. If you opt for this route, the process is quite different for getting financing throughout the design and building process.
When building Chicago new construction, there are certainly a number of details the builder and architect need to develop. Perhaps the most important one is putting together an extremely detailed proposal. This should include the scope of the project and details like how money is to be released to various contractors and subcontractors a long the way. It should also include what checks and balances will be incorporated for signing off for the release of their money.
The buyer should do a good deal of research on how a Chicago new construction home will be financed.
Typically, a buyer will obtain a loan both for the land and for the construction work or pay cash for the land and finance the build. A construction loan is usually the answer during the building phase until the home is complete, when the loan can then convert into a standard mortgage.
First and foremost is finding the right lender for a construction loan. A great place to start is a bank that you already have a relationship with so they can help you navigate and find the loan that will work best. It also couldn’t hurt to talk to your builder to see if he can introduce you to his banker, who could have a better interest rate due to their relationship.
Navigating a Chicago New Construction Loan
There are a number of different types of construction loans, but a fairly common loan for this type of real estate purchase is a one-time close construction loan or a construction-to-permanent loan. This type of loan covers the cost of building the home then transitions into a regular mortgage loan. The loan functions like a line of credit during the building phase and covers pre- and post-construction financing—meaning there is only one application and one closing.
Financing like this helps borrows with cash flow, since there are usually only interest payments due during the construction period. Plus, construction loans can also get borrowers a great interest rate if the rate is locked in at the time of application with a 30-year, fixed mortgage.
If you’re considering a construction loan to build a brand-new Chicago home, I have a few recommendations for navigating the process:
Employ a real estate attorney. Specifically, one who specializes in new construction, so that any contracts and documents are reviewed in full. An attorney will ensure all t’s are crossed and i’s are dotted so that you both understand every aspect of the construction loan and avoid any surprises.
Be prepared for appraisal setbacks. Lenders will provide financing based on the appraised value of the home, which can come in much lower than the cost of building, if say, the other houses in the neighborhood don’t quite stack up to your dream home. If this is the case, a buyer would have to make a larger down payment to get the loan amount needed to build the home.
Watch for extra fees. Make sure you know the ins and outs of the loan, including any extra costs or penalties, such as origination fees or penalties for refinancing or prepayments.
Understand the interest rate. Some lenders only offer construction loans with an adjustable rate. Others charge a higher rate compared to the cost of a standard jumbo mortgage. Make sure you understand the interest rate for the entire life of your loan, not just the first few years.
I’ve worked with a number of buyers who have built new construction property they thought they’d only dreamt of. While it can certainly be more work, you can build a truly spectacular home that is exactly what you’re looking for. If you’re interested in a Chicago new construction property or seeing if a construction loan is right for you, contact me at (312) 498-5080 or email me at [email protected].