As mortgage lending tightened over the past few years, many lenders stopped offering custom construction mortgage options, leading some to believe these products are no longer available. In reality, they’re still available, and they can offer significant advantages both to existing homeowners looking to update their home and to those looking for a new home.
In tight housing markets where inventory is low, it may make financial sense to have a home custom built or update an existing home, especially if you want to stay in the same neighborhood.
Building a custom home or updating an existing house may offer other significant advantages. For example, a custom home or major remodel lets the occupants customize the layout, features and configuration to best serve their individual needs. In addition, they can take full advantage of current green building technology and trends. It can also be a cost-efficient decision, eliminating the hassle and cost of selling a home, moving and obtaining a new mortgage.
Although the environmental benefits of green practices are well understood, most people aren’t aware of the additional advantages they can provide. A green home is a healthy home. Contractors who specialize in green building and remodeling today generally go far beyond dual-pane windows and low-flow shower heads. They also focus on indoor air quality, enhanced durability and improved comfort.
According to The Inside Story: A Guide to Indoor Air Quality, recently published by the Environmental Protection Agency, “In the last several years, a growing body of scientific evidence has indicated that the air within homes and other buildings can be more seriously polluted than the outdoor air in even the largest and most industrialized cities. Other research indicates that people spend approximately 90 percent of their time indoors. Thus, for many people, the risks to health may be greater due to exposure to air pollution indoors than outdoors.”
Current green building practices emphasize principles like the utilization of low volatile organic compounds (VOCs). In effect, VOCs are chemicals that are released into a living environment. They’re found in most paints, carpeting and other construction materials.
A home built or updated to include this green and healthy approach also offers significant advantages in regard to occupant comfort. By properly engineering the airflow and reducing the energy needs of a house, occupants can enjoy a home that maintains a uniform temperature.
If you’re considering having a custom home built or updating a current residence, there are many financing options available today from equity lines to full ground-up custom construction loans. Lenders who offer these specialty products can help consumers match the loan type to their specific needs.
A full construction home loan can be used to build a home on a vacant lot or make significant renovations to an existing home. In addition, other home loan products let you finance construction costs for less significant projects to purchase an existing home and upgrade it to meet the needs of the new buyer. Renovation-inclusive programs let buyers include both the acquisition and improvements into their purchase loan so they can create the perfect house for their needs without compromising. The opportunity for financing improvements into the mortgage opens up more inventory options for homebuyers.
There are many financing options available today. Many of these programs can even be used to combine the renovation into the purchase loan. This lets someone in the market effectively create his or her own inventory. For example; a buyer looking for a three-bedroom, two-bathroom house in a neighborhood where there are only two-bedroom one-bathroom houses currently listed can purchase the smaller home and convert it to the upgraded home they wanted. Some home buyers are only interested in updating the energy efficiency of the home, and there are programs specifically designed for that purpose.
These renovation-inclusive home loan programs let buyers close on the home purchase with the funds for the improvements held by the lender to be disbursed to the contractor as the work progresses. As a result, this doesn’t impact the seller or create a barrier to getting this type of offer accepted. It also protects the interests of the buyers, as no work is started until they’ve taken ownership of the property.
An additional benefit of renovation-inclusive financing opportunities is the ability for a buyer to purchase a home that wouldn’t generally qualify for financing. If the property condition issues are a barrier to financing but will be addressed in the scope of work in the budgeted project, renovation-inclusive financing will let a buyer finance that house.
Some of the available options for purchasing or upgrading a home include custom construction loans, the Fannie Mae HomeStyle Renovation, FHA 203(k), energy efficient mortgage, and home equity lines of credit.
The first step is to get preapproved for a home loan amount that covers the upgraded home value when construction is complete. In addition, both the builder and project must be approved by the lender before starting work. Some lenders have in-house construction teams who manage construction draws, which are essentially the project funds the builder will request as needed throughout the process. It’s important to find a mortgage loan officer who has expertise in these specialty products. He or she needs to understand your goals and clearly explain the home loan and construction financing options so you can make an informed decision.
Dan Starelli NMLS #297718 is senior vice president and regional manager and Kevin Nunn NMLS #305826 is construction/renovation sales manager at Umpqua Bank’s home lending division. You can reach them at danstarelli@umpquabank.com and kevinnunn@umpquabank.com, respectively. Umpqua Bank is Member FDIC and Equal Housing Lender, NMLS #401867.
