How do we finance a build?

10 years ago

We're looking at a ready-to-build house. We've priced out a house and lot in a builder owned subdivision. The builder offers financing, with 10% earnest money paid over the length of the build. I read another thread (cannot find it now) in which posters recommended NOT paying 10% earnest money to the builder. This situation works well for us, we are preapproved, will only have one closing, can lock in a rate, can really plan out what our payments will be. The builder is doing well, purchasing many started but failed subdivisions and building many new homes, selling out many lots. What are our options for financing a build like this?

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Comments (5)

rrah
10 years ago
Do you mean the builder will finance the construction or the builder will finance the final mortgage? Those are two different things.

The other thread you mentioned was a different scenario: essentially holding back the builder's paycheck. That's very different than earnest money which will be used as the down payment for the house. I can't imagine a builder financing the construction of a house for you without a down payment. Without that, he could sell it someone else.

One warning--unless the builder is doing the final mortgage financing (and personally I find that hard to believe) you are probably months away from locking in a rate. The only time I've heard of a builder providing financing for the final mortgage was large national builders that had a financing arm of the corporation.

This post was edited by rrah on Fri, Apr 4, 14 at 18:22
lethargo
Original Author
10 years ago
Rrah, I'm referring to a different thread from the one you describe.
The builder is financing the construction and we will secure our own loan. We've already spoken with the mortgage company and we can lock a rate with them. They are not affiliated with the builder, but have closed loans for buyers with this builder before.

We're really trying to just see what all of the options are and feel satisfied that we're making the best choice at the moment, with the information given.
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rrah
10 years ago
For any contract to be valid there must be "consideration." In the real estate world that usually is in the form of earnest money.

My point is that the builder has no obligation to sell you that house upon completion without consideration. Why would he want to build a home if you have "no skin in the game?" Some one else can come along, offer him a few thousand more, and you are out of the house. I've financed two homes we've built. One with the builder paying for the construction costs, and one with a traditional construction loan. When the builder is willing to do the construction financing it's often easier. As the builder, I would not proceed unless you were willing to offer the earnest money or unless I retained the right to sell the house to someone else.
lethargo
Original Author
10 years ago
I'm trying to understand if there are any negatives or why anyone would suggest 10%earnest money is a bad idea. For example, are we protected if the builder goes belly up? Is it better to pay in increments over the course of the build or all at the begining?

We feel like this is a good fit for us (and understand why the builder deserves the earnest money) but as with any major purchase are treading cautiously and are trying to understand the different options, with some input from impartial third parties.

Thank you!
kirkhall
10 years ago
Do you understand earnest money?

I would expect that you are paying 10% at the start, then the builder is financing it until the end, at which point you pay off your loan with HIM (for building it) with your own bank loan.

Am I not understanding this correctly?

You don't buy it until the end product. But, you do pay some earnest money up front to say, you are committed to buying it.

As far as paying the 10% all at once or in increments--you'd pay that all at once. But, only 10%.

I am just not sure what your real financing situation is.

How do we finance a build?

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rrah

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How do we finance a build?

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rrah

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kirkhall

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lethargo
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lethargo
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