Should the Builder Finance Construction?
going to have a house built for us, and are wondering whether or not we
should finance the construction or allow the builder to do it? Some
builders won't do it but others will if the customer wants it… Is there
any reason I should prefer to finance construction myself?"
I see three advantages in having the builder finance construction:
- You need to take out only the permanent mortgage, avoiding the complexities involved in having to decide between two separate mortgages and one combination mortgage. See Pitfalls in the Financing of Home Construction.
- You have assurance that the builder has sufficient financial capacity to do the job.
- A builder paying interest on a construction loan has an incentive to get the job done as quickly as possible.
There are two possible disadvantages in having the builder finance construction:
- The builder must have title to the land to obtain construction financing, and switching title is costly in some states.
- The buyer who is financing construction is committed to the transaction, making the builder willing to modify the design. The builder with less of a commitment from the buyer may be reluctant to make any modifications in the design that would negatively affect its marketability in the event that the deal falls through.
Shopping houses offered by different builders is a good idea in either case. Just remember that the price quote from a builder who finances construction is not comparable to the price quote where you must finance construction.