Carolyn and Robert were so happy they could hardly control their emotions. After years of planning and preparation, their dream to build their "perfect" home - in a private setting on a lake with the media room they always wanted, the outdoor swimming pool and so many other personalized upgrades - was finally coming true. The idea of building your own home is breathtaking. However, along the way, many of you give up and purchase a home in a standard subdivision.
Why does this happen? Often, the financing can become so confusing and complex that it drives you away. Lets take a closer look at some of the financing methods available to you today.

CONSTRUCTION LOAN

One method of financing your new home is to obtain a construction loan in your name working as your own independent contractor. The bank will usually only finance 75% of the construction cost with you being required to put 25% cash or equity infusion into the project. While desirable on the surface, it is the least desirable method of home financing for the following reasons:

• These loans are really designed for professional builders, so the interest rates will be based on the prime lending rate plus one or two percent. Based on today's market, that would be an interest rate of approximately 10%.
• Your options for financing will be limited (if your not a professional builder) to a small community bank that will primarily be loaning money based on your relationship with the bank, not your experience as a builder.
• If you plan to have your home constructed without a professional builder to coordinate the project, ask yourself, "Will I have the time to oversee subcontractors?" Without adequate supervision and management, the building of your home can become the next nightmare on "Elm Street".
• You will probably find yourself limited to retail pricing on appliances and other supplies, since you will not have a builders volume discount.
• Do you have the skills to spot defects or possible problems?
• Can you stay under budget? Even experienced builders run into problems at times.

This is just a sample of the issues faced by those of you who try to contract and finance your own home yourselves.

CONTRACT WITH A BUILDER

Another option is to contract with a builder to build a home according to your plans and specifications. This is very popular, as the builder is able to what he does best - build homes. In this situation, you would generally need to get pre-approved (not just pre-qualified) before the builder will begin. This entails submitting all necessary documentation to your lender in advance so the builder can deliver your approval to his lender.
This documentation consists of the last two years W-2's or tax returns, pay stubs for the last 30 days or a profit loss statement if income is from self employment earnings (or the majority of your income is from a non - W-2 source), and the contract with your builder. Your builder's lender will then approve the loan as a contracted construction loan, as opposed to a speculative construction loan.
While this method is used quite often, it has some drawbacks:

• The builder will incur the financing and closing cost, since he or she is getting the loan. Therefore, the 10% interest and closing cost will be added back into the cost of the home.
• Some homeowners complain of a feeling of loss of control. The builder has the money, has the supplies and controls the timetable.
• There is also a question of allocation of funds. Is the builder using the money for your home, and only on your home?

While it is very important to note that a reputable builder will keep you informed and manage funds properly, these are some of the issues new homeowners have found themselves faced with at times.

CONSTRUCTION - PERMANENT LOAN

Comparing the two preceding options, you may begin to feel discouraged. But don't! There is one way to get the best of both worlds by using the Construction - Permanent loan program. Here are some of the greatest advantages to opting for this program:

• The loan is on you as the borrower. The advantage is you do not have to worry if the builders other construction loans impact the construction of your home. This is a separate loan to you with the builder not taking any financial liability. Therefore, he will always have the money to build your home, as opposed to having to juggle money from one line of credit over multiple houses.
• Some lenders will set up your account to wire construction draws directly into whatever account you specify. This allows you to control the money. This is one method of "checks and balances" to insure what you want is being done in each phase of construction.
• Some lenders will also establish your account so that there are no payments on interests during construction. The advantage here is you will not have to make payments on the money the builder draws on. This is great if you have a home to sell and cannot manage two mortgage payments.
• You don't have to worry about re-qualifying for the home again once the house is completed. This is important because any lender will want current financials on you when they underwrite for the permanent loan. This leads me to my next advantage...
• No double closing cost. You would not be paying for the builders closing cost rolled into the loan and your own once the house is completed and you apply for permanent financing. You only have one closing before construction starts.
• Interest rate protection is another benefit. Do you know what rates will be in six months? However, some programs will offer you a roll-down option: if rates are lower once the house is completed, they will automatically roll you down to the lower market rate. If rates go up, you will not pay any more than the rate at which you closed. This option alone is worth its wait in gold. To qualify for such a loan you would need the documents mentioned in "Contract with a Builder" section above.

Though there are other advantages to this program, the peace of mind stands out in front. Imagine the peace of mind you will have knowing that the closing is behind you and the builder is getting you what you want, while you maintain control.
Carolyn and Robert were elated that they were able to build their dream home and stay in complete control. If they did it, so can you!