Title Topics: New Construction

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Finding a home that meets your needs can be difficult. Maybe you’ve found the perfect location, but cannot find the perfect house. Why not build one that fits you perfectly? There’s a lot to think about when deciding to build a new home. Here are a few things to consider:

New home construction loan versus a mortgage

When building a new home, you do not simply apply for a mortgage; you must apply for a new home construction loan. These are short-term financing options that cover the cost of construction during the actual building process. Rather than receiving a lump sum upfront, borrowers are placed on a schedule for receiving funds. This schedule is based on the construction stages of the home, to be used for making payments towards things like pouring the foundation, framing and installing heating and cooling systems, and the completion of finishing work, like painting and carpeting.

Many large builders will provide a construction loan for buyers who provide an initial deposit. In most cases, construction loans are usually converted or replaced by a standard mortgage once construction is complete. This process of new construction of a residential property is similar to that of a commercial property.

How does a newly constructed property impact title insurance?

Although you are building a brand new house that no one has previously lived in, the land was most likely held by many prior owners. When title insurers perform a title search, they will uncover any existing liens, such as payments on the property that a builder may have failed to pay. Your lender will require that the title is clear of any liens prior to closing on the home. Therefore, part of the mortgage process will include obtaining a title insurance lender’s policy.

Another matter that the borrower needs to consider is the owner’s policy. Often if the land purchase occurs before or separate from the construction loan, they may be tempted to get the owner’s policy based on the value of only the lot.  The problem with this is that the lot is usually only a fraction of the total home cost. If they were to have a title claim, the insurer’s liability would be limited to the purchase price of the lot, not the value of the completed home. It is recommend that the borrowers obtain an owner’s title insurance policy for the full value of the lot and the completed home.

For more information on the different types of title insurance, click here.

Any Questions? Comments?  Please let us know!

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