Embarking on the journey of building a custom home in Kansasis an exciting endeavor that allows you to create a space tailored to your preferences and needs. However, understanding the financing process is crucial to turn your vision into reality. Here’s a comprehensive guide to help you navigate the financial aspects of custom home construction in the Sunflower State.
1. Understanding Construction Loans
Financing a custom home typically involves securing a construction loan, a short-term loan designed to cover the costs of building your home. Key characteristics include:
- Disbursement in Phases: Funds are released in stages, known as “draws,” corresponding to different milestones in the construction process. This ensures that funds are available as needed while keeping interest costs aligned with actual expenditures.
- Interest-Only Payments: During construction, you’ll generally make interest-only payments on the disbursed amounts, helping to manage cash flow until the home is completed.
2. Transitioning to Permanent Financing
Once construction is complete, the loan typically transitions into a permanent mortgage. Many lenders offer Construction-to-Permanent (CP)loans, which streamline this process by combining both construction and permanent financing into a single loan with one closing. This approach offers benefits such as locking in your interest rate from the start and reducing closing costs.
3. Eligibility Criteria
To qualify for a construction loan in Kansas, lenders typically consider several factors:
- Credit Score: A good credit history is essential, with lenders often seeking a minimum credit score of 680.
- Down Payment: A down payment of 20%–30% of the total project cost is commonly required.
- Financial Reserves: According to theFederal Bank of Kansaslenders may look for 5%–10% of the loan amount in reserves, including assets like 401(k)s, checking and savings accounts, and IRAs, to ensure you can handle unexpected expenses during construction.
4. Selecting a Reputable Builder
Choosing an experienced and licensed general contractor is vital. Lenders often require borrowers to work with qualified builders to mitigate risks associated with construction projects.
5. Preparing Detailed Plans and Budget
Lenders will require comprehensive constructionplans, specifications, contracts, and budgets to conduct a preconstruction appraisal. This thorough evaluation helps determine the loan amount and down payment based on the loan-to-value ratio.
6. Local Kansas Lenders Offering Construction Loans
Several Kansas-based financial institutions offer construction loan options:
- First Federal Bank of Kansas City: Offers Construction-to-Permanent loanswith interest-only payments during the construction phase and a seamless transition to a permanent mortgage.
- CommunityAmerica Credit Union: Provides Construction-to-Permanent loans with one-time closing and the requirement to use a licensed builder.
- Capitol Federal: Offers Construction-to-Permanentloans with a one-time closing, covering both construction and end loan financing, and an interest rate locked for the life of the loan on fixed-rate loans.
7. Additional Considerations
- Interest Rate Locks: Some lenders allow you to lock in your interest rate at the beginning of the construction process, protecting you against potential rate increases during construction.
- Loan-to-Value (LTV) Ratio: Understanding the LTV ratio is crucial, as it affects the loan amount you can qualify for and the required down payment.
Building a custom home in Kansas requirescareful financial planningand collaboration with experienced professionals. By understanding the financing options and requirements, you can confidently move forward in creating the home of your dreams.
PRO TIP: The information provided in this article is based on current practices and may vary by lender. It’s advisable to consult directly with financial institutions for the most accurate and personalized guidance.
