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As for financing a new construction home, you can consider these two solutions.
The first solution is where you buy a residential lot and commission a builder/GC (General Contractor) to build on the lot to your architect plans and specifications. You will then need to secure construction loan to get access to money to pay the builder/GC for labor, materials and etc. Construction financing is based on as completed value; most lenders will finance up to 80% LTV (Loan to as completed Value). The builder is paid through several draws authorized by you for work completed until the new construction home receives a certificate of occupany. Once the home is near this point, you can secure a permanent, end mortgage to pay off or refinance the construction loan, since construction loans are usually good for a short period, for example, 12 months period.
The second solution is where you commit to a builder/GC who can buy the lot and build a new construction home for you. With this, you depend on the GC to use their financing to acquire the lot, pay for labor, supplies and etc. The builder/GC will likely expect a down payment and or sizable deposit from you and require that a lender preapprove and deliver a loan commitment on your behalf. This because the GC wants to make sure you are good to buy the custom new construction and will successfully close once the home is finished by them. Please note this solution may not be favored by GCs right now because they are cautious to not be stuck with a new construction home that you nor someone else may not buy and close with them.
You are welcome to contact me if you require a personal consultation.
"New construction" typically implies that someone else built the property (I.E. new construction developments) and they secure a contract with you upfront with some amount for a deposit (5-10% usually, perhaps more now in this market) and at the same time, you could possibly do a long-term lock to protect yourself from program changes while your property is being built. These are end-loan solutions for projects that someone else financed.
Construction loans are different because YOU (and your bank) are financing the build-out. I.E. You're now absorbing all the risk along with the lender and the builder, outside of doing his/her job, isn't really taking as much risk as they're getting paid after each draw (a portion of the build-out) is completed.
As William said, most lenders require a sizeable amount down to do a construction loan due to the increased risk involved. If you only have the 3.5% down payment, your options may be limited.
A suggestion though: I work with a construction company that helps you consult to be your own general contractor (if you'd like) or will act as a consultant to help you keep the cost of the project down so you have significantly more equity at the end of project completion. It might not be a bad idea to meet with them to go over your scenario, it may end up being what you're looking for. Shoot me an email or phone call if you'd like to get more info on them.
I hope this thread has been helpful to you.
If you're interested in building a new single family home, then you should be aware that there are fewer loans available for land purchases than there are for existing building purchases. Many lenders do not lend on vacant land parcels and require developers (of any size) to purchase their land in cash.
I can forward you a list of lenders whom you might want to talk to if you'd like to email me directly. Any of them should be able to assist you with any of your various loan needs (and if they can't they will tell you up front).
Let me know if you'd like the list of names.
Broker Associate, Sudler Sotheby's International Realty