As of September 2021, America’s housing market was short by more than 5 million homes. That’s not only due to the pandemic. Housing starts simply didn’t keep up with population growth for the last 10 years.
It’ll take years for builders to catch up. It might seem like a bad situation, but there’s a huge opportunity if you want to capitalize on it.
You can build your dream house yourself.
Why wait for the housing market to cool down? By that point, interest rates will be much higher than they are now. A residential home purchase can cost much more because of increased competition.
About 6,000 homes sold for $100,000 above the asking price in the first few weeks of 2022.
Is financing a new house possible? It is with a SPEC loan.
Read on to find out more about qualifying for a SPEC loan and how you can use it to build your dream house.
What Is a SPEC Loan?
A SPEC loan is used to finance the building of a home on spec. The bank assumes that a builder will complete the project on time and sell the property to repay the loan.
It’s used by builders, investors, and individuals for a variety of projects.
Builders use SPEC loans to develop land, build homes, and sell them at a profit. Investors use them to build homes or for fix and flip projects.
Individuals use them to build their dream homes.
SPEC loans are very different from a standard home loans. For starters, they don’t last for 30 years as mortgages do. The terms of the loan last only between 6 and 18 months.
They also have higher interest rates. Lenders take a huge risk to finance a project that’s just an idea on paper. A borrower may have house plans, but that’s it.
With a mortgage, there’s an existing asset with value. Lenders protect themselves by making mortgages secured loans. If a borrower defaults, then the lender takes the property to make up for the loss of the loan.
SPEC loans are unsecured loans until the project gets completed. A borrower that defaults will have a horrible credit report for years, but they can keep the property.
How do lenders protect themselves from massive losses? According to this guide for builders financing, expect to see interest rates between 12% and 18%.
Lenders ask for a 20% down payment. You’ll lose the down payment if you default on the loan.
You might wonder how you can use a SPEC loan to build your dream home if you have to pay the loan back so quickly. You can convert it into a 30-year mortgage.
This is a C2P or construction to permanent loan.
SPEC Loan Process
The SPEC loan process works a little differently than a traditional home loan. You can prequalify and get preapproved for a loan, just like a mortgage.
Get prequalified first to get an idea as to how much you can get. This will help you set your home-building budget. You might have had ideas of luxury features. They could go out the window if you can’t get the funding for them.
To get preapproved for a loan, you’ll need to have house plans and a builder in mind. You’ll have to show blueprints, house plans, and the home’s specifications.
Lenders may also want to see a builder’s financial information. Not all builders will be comfortable with that. Builders who worked on spec projects are used to this, so it shouldn’t be an issue for them.
Lenders need your information as well. They need proof of income, previous tax returns, credit reports, and down payment information.
Qualifying for a SPEC loan and getting approved doesn’t mean you’ll get the loan in a lump-sum payment. You’ll have to put up money upfront to start the project.
Loan money funds payout at certain intervals during the project. Lenders inspect the job site to make sure the house build is on track. Then a portion of the funds gets paid out.
Finding a SPEC Loan Lender
There are many lenders that don’t deal with SPEC loans because they’re so risky. You’ll want to find a lender that has plenty of experience with SPEC loans.
Ask them about their experience with SPEC loans. Have them explain the loan process to you to make sure they understand the SPEC loan process.
Find out what kinds of SPEC loans they offer. Have them explain the pros and cons of each one for your situation. You may find a lender who works with construction loans guaranteed by the federal government.
These can lower your down payment and make building your dream house closer to reality. Another way to lower the down payment is to use the land’s equity as part of the down payment.
Learn if your lender accepts this option or not.
Lenders should be able to tell you about loan programs with different interest rates. They may have a loan product that has a low variable rate or a fixed rate loan.
There will be closing fees. Know what they are and if there are any other fees involved with the loan. The lender should be fully transparent with you.
If you plan to convert your SPEC loan to a permanent one, ask the lender if they do this and what that process looks like.
Build Your Dream House With a SPEC Loan
It is possible to finance your dream house with a SPEC loan. You can build the house exactly as you want. Now that you know what the SPEC loan process looks like, you’ll be able to go into the house build with eyes wide open.
It makes qualifying for a SPEC loan easier because you know exactly how to get approved.
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