If you're planning on buying a new home, the odds are very likely that you'll need to get financing to afford the purchase. Although some home buyers pay in cash, it's much more common for people to take out a mortgage when buying. Eighty-six percent of buyers financed their purchase in 2018, according to the National Association of Realtors (NAR).
Before you start the process of looking at homes for sale in Allen County, Indiana, it helps to know how the financing process works. Doing a bit of prep work will help you find and design the home of your dreams, without busting your budget.
How Much Home Can You Afford to Buy?
The first thing to do when getting a loan to build a home is to figure out the price of a home that works with your budget. The general rule is to spend no more than 28% of your monthly income on all housing expenses, including your mortgage, property taxes, and utilities. If you earn $5,000 per month, you can afford to spend $1,400 on housing expenses, for example.
What does that look like in terms of the price of a home? To figure that out, you need to consider how much you can afford to put down upfront. Although having a 20% down payment means you'll avoid paying private mortgage insurance and can mean a lower interest rate, the average down payment is closer to 12% of the home's price, according to NAR. First-time buyers usually put down less, around 6%.
Figuring out the exact home value you can afford can involve a lot of math, but fortunately, there are many mortgage payment and affordability calculators available that will handle crunching the numbers for you.
Getting Pre-Approved for a Home Loan
Another part of the process of getting a mortgage to buy a custom home is getting pre-approved for the loan. Mortgage pre-approval starts the loan application process. During it, a lender reviews your income, employment history, and credit history and lets you know the amount you are likely to be able to borrow as well as the interest rate you'll get.
You can use the pre-approval to make yourself a more attractive buyer to home builders and sellers. You can also use the pre-approval to get a sense of what you can afford to buy.
Construction Loan vs. Mortgage
When building a custom home, it might be the case that you need to apply for a construction loan, rather than a traditional mortgage. Getting a mortgage depends on having a physical home to serve as collateral on the loan. Before the house is built, there's nothing to serve as collateral.
A construction loan can cover the cost of building the home only or it can convert to a mortgage once the building process is complete. Your lender can help you determine which type of loan will work best for your situation.
If you're looking to buy a single-family home in Allen County, Indiana, and are interested in a custom home, Lancia Homes is here for you. We've been building custom homes since 1975 and can help you through the entire process, from designing the home to finding the financing that right for you. Contact us today to learn more.