Construction Market Good for All Home Buyers
The Oklahoma City Metropolitan area has experienced stable growth in residential construction during the past five years. Total new construction starts provided monthly by DHARMA Inc. reflect 25,848 new housing starts from 2011-2015 and 990 year-to-date starts for 2016.
With the current concerns with the local economy, housing starts year to date from last year are only down 25 percent. The Oklahoma City metro leaders have done an outstanding job diversifying the work force. In an article published by Business Insider, “The 11 best cities for young people to buy a home,” OKC was ranked #1. Millennials have begun to recognize the advantages of home ownership, and the median home price according to the Business Insider is $148,300. A majority of the new construction homes range from $130,000-$285,000, allowing first-time home buyers an affordable opportunity to purchase new homes with manageable down payments along with mortgage payments.
Many potential homeowners like the idea of new construction homes because it allows them to choose the amenities and features without having to “update” when purchasing an existing home. Some of the new housing developments also offer desirable walking trails, greenbelt areas, parks and pools.
There are three ways of obtaining construction loans.
*First option, the builder takes out the construction loan. Once the builder and buyer agree on the house plans and budget, the builder submits it to the bank and requests a construction loan. Banks will lend between 85-90 percent of appraised value or 100 percent of cost as long as the loan amount does not exceed 85-90 percent of the appraisal. The builder is responsible for closing costs and interest payments. The bank will request that the potential buyer be pre-approved from a mortgage company for permanent financing once the house is completed. The builder and buyer agree and sign off on funds being advanced during the time of construction to pay for the work that has been performed during certain stages. This keeps the buyer involved from a financial standpoint as well as within budget. Once the home is completed, the buyer closes, with a mortgage company paying off the construction loan.
*Second option, the consumer/borrower takes out a construction loan. Often, the consumer/borrower already owns the land. Most (if not all) banks require the borrower to have a builder contracted for the build. If a bank is not familiar with the builder, additional documentation will be required. Construction loan terms will vary. The loan-to-value will be the same as mentioned above. However, when the consumer/borrower take out the construction loan, he/she is responsible for financing terms of the construction loan. General terms with most banks is a 12-month note. The interest rate generally will be between 5.0-6.0 percent, with monthly interest-only payments on the funds advanced during the time of the billing cycle. Once the house is completed, the borrower closes, with a mortgage company paying off the construction loan. Getting a construction loan has become more difficult with passage of the new Consumer Financial Protection Bureau rules. As mentioned in the first scenario, banks require borrowers’ pre-approval with a mortgage company prior to closing. In limited situations, banks may hold onto the loan, convert it into a permanent loan and keep it in their lending portfolio; rates and terms are usually not as favorable.
*Third option, one-time close through a mortgage company. Here, the borrower works directly with the mortgage company. The builder must be approved by the lender, who will request that the builder be licensed, bonded and provide referrals. The borrower pays all the closing costs up front and not duplicate closing fees at the end of the construction loan when they convert to permanent financing. Generally, the lender requires a 10 percent down payment up front at the initial closing. The interest rate varies depending on the lender. The borrower pays monthly interest-only payments until completion of construction. Another advantage of this option is that you can lock into your permanent interest rate for your mortgage up to nine months out from completion of your home. You will want to be certain the house will be completed within the lock expiration date, or you may have to pay additional fees.
The new construction market remains a great opportunity for first-time home buyers, as well as others. The permanent interest rates are staying in the low 4 percent to middle 3 percent range. We are fortunate to have a great number of good builders in our area.
Brent Colgan is VP/Commercial Lender, Frontier State Bank