At Alair Homes Arlington, we work with clients who have a vision for new construction in Northern Virginia, and they don’t always understand how to make it happen. The current economy has been unusual in that interest rates to borrow for a major project have reached historic lows, and with the rates tied to the bond market, they remain low and highly attractive. Now is an excellent time to consider making that leap to fulfill the dream of the ideal home, which has the added benefit of increasing the value of your home.

There are several paths that homeowners can take and some critical decisions to make in consultation with finance and construction professionals. Many of our clients aren’t sure where to start, if or how much they can borrow, or how the whole process works. To get to the bottom of some questions, we spoke to Mark Ferguson, a highly experienced mortgage lender who has helped some of our clients with the process.

How Do I Pay for New Construction in Northern Virginia?

Unlike a small renovation or repair where it might be possible to put the entire cost on a credit card or pay in cash, new home construction in Northern Virginia, whether it starts from empty land or a tear-down of the existing structure, takes a significant investment. However, because the property’s value at the time of closing doesn’t reflect the expected value at the completion of the project, a standard mortgage based purely on present value probably won’t cover the cost. On the other hand, some financial institutions offer a variety of loan structures that allow a homeowner to borrow the money needed to buy the property and pay for the construction. In other words, you are borrowing from the “future” value of the home once it is completed. Different lenders have different structures, so we recommend asking some questions to make sure you pick the loan (or series of loans) that best fits your needs. Make sure to do some research to make sure you are working with a reputable lender. Your contractor or architect may have some suggestions of lenders who they’ve worked with successfully in the past. Just like an ordinary mortgage, these types of loans come with closing costs, which increase the loan by a significant amount.

Can I Get A HELOC?

If you are planning for a minor project home renovation, another type of loan might work: a Home Equity Line of Credit (HELOC). A HELOC is a line of credit drawn on the equity that a homeowner has in their home. This is the home’s value that exceeds the current mortgage amount. Put another way, it is the present value of the house, less the amount of the mortgage. HELOCs have minimal closing costs and tend to have competitive interest rates, which makes them an attractive funding source for some projects. However, since the homeowner’s equity is less than the value of the entire house, the amount tends to be less than the amount that can be borrowed for a mortgage. As a result, these loans don’t tend to be sufficient for significant home renovation or new construction.

How Much Can I Afford For New Construction in Northern Virginia?

Every homeowner’s dream home looks a little different. Deciding how to get as close to the dream as possible is a little juggling act. It starts with what you can afford in terms of a monthly payment. For a new construction loan in Northern Virginia, the lender will look at several things:

When you look at each of these variables, some things become confusing – how do you know how much the construction budget needs to be if you don’t know how much you can afford? Mark’s short answer is to do some intelligent estimating, like using some easy tools to figure out your qualification for a loan, doing some research on home values in the area where you plan to do the work, and then talking to an experienced builder about your basic hopes to get a rough estimate. This launches a back-and-forth between the lender, the homeowner, and the builder to arrive at a final number that results in a home whose value is supported by the market. This means that the homeowner isn’t left high and dry with a house that isn’t worth the loan amount.

When considering the loan budget, Mark recommends that the homeowner and the builder have as detailed a budget as possible. Allowances open the possibility of a cost-overrun that the homeowner needs to pay in cash. “While we recommend a reserve for the unexpected expenses, we strongly urge our borrowers to work with their builders to make decisions about the budget before closing on the loan,” suggests Mark.

How the Construction Loan Works

A construction loan has a lot of built-in security to prevent the builder from walking away with the money (or the homeowner from spending it on something other than construction). The loan funds stay with the bank and go through phases of distribution dictated by the terms of the loan. If the loan includes a property purchase, that amount is distributed at the closing. The remainder of the loan is distributed directly to the builder by the lender. Generally, the builder applies for compensation for a completed portion of the project by submitting proof of completion to the lender. The good news is that, during construction, the loan payments are one for the amount distributed, so you aren’t paying for money that hasn’t been paid out. Once the project is complete, the builder is paid their balance, and the loan usually converts to a standard mortgage.

Are you thinking about new construction in Northern Virginia? Be proactive about finding a builder who will work with you to find the right lender to meet your needs. Contact us today to talk about your dream home.