So I really suggest building a house without the use of a loan at all. That isn’t what Kyle and I did (and it may be unrealistic for most of America) but it would have reduced 90% of my stress. Plus you could then build whatever house you wanted, whenever you wanted!
For example: let’s say you want to build a two bedroom house with a basement and put two bedrooms in the basement (so now you are essentially a 4 bedroom house)…. well the bank is not going to loan you that much on that house (so you’ll need to fork over a lot of cash) because the resale value on the house (and what the auditors site will report in our county at least) is that the house is only a two bedroom house.
Ok. maybe that example isn’t applicable. How about this one……… you buy your land out right and decide to do some of the land clearing yourself and add a half driveway so that you aren’t parking your truck on a busy road. Well, when you go and get your loan the bank considers the driveway a land improvement and there now could exist a lien on your property and the bank is going to be real skeptical about loaning you money. (A lien might exist if you hire a dump truck to bring you a ton or two of gravel- you pay the driver of the truck, but he never pays the gravel company…. the gravel company can now put a lien on your land until they get paid by the driver.)
The second example did happen to us. Not the lien, thank goodness, but rather the bank was not happy we put a half driveway in.
I know that some of us are not in a position to pay for a $300K-$400K house in cash so a loan is inevitable. So, there are some basic recommendations and knowledge I’d love to share with you on the whole loan/drawing money process. Plus some suggestions on how to choose a mortgage company. However, like all my posts, my disclaimer is that this is different with each bank and builder…… so the following is just how it worked for us:
1) I would suggest a 100 times over to pick a mortgage company that your builder has worked with before. We did not do this. This will come in handy when you go to do draws. It will come in handy with inspections for draws. And it will come in handy to avoid things like my example above.
-
- Our mortgage contact was wonderful, but the construction department was where it would have been easier to work with someone who was familiar with our builder. So if you know someone in the mortgage business- maybe use them (if the rates are favorable) for after the construction loan is done (if that is even allowed??).
2) To be qualified for our loan we had to provide all the typical W2’s, Tax Returns, Bank Statements, etc. plus the following:
-
- House plans.
- Our cost sheet. Our bank had some questions on our cost sheet (ex: the house plans show an extensive porch so they wanted to know which line item the porch was included in since it was not a separate item.)
- Then they had us turn in a cost sheet breakdown that they typically use (so basically just copying the information from my sheet to theirs) and having our builder sign it.
- A Builder’s Contract. Our builder didn’t have one of these nor our bank.
- Letter of Explanation, receipts, and lien waivers for the half drive way.
3) The bank will require you to put (in cash or property) 10% to 20% of the total amount your house appraises at. So some math:
-
- The cost sheet of my house to build (without consideration of any of the savings I plan/did have) was $382K.
- Our land was purchased at $36,500 and appraised at $42,500.
- Our house (based off comps in our area and our cost sheet) appraised at $425K.
- The “comps in our area” is very important. Let’s say we had one of the more expensive houses in our area to build, but the housing market didn’t support that, the bank won’t lend you money on it because if you foreclose they won’t be able to sell it because it is too expensive of a house). So that would mean you either need to downgrade your house to meet comps in the area or put more cash into it yourself.
- So the amount of cash or property we needed to bring to the table at closing was $42,500 (for 10%) and $85,000 (for 20%).
- So our land that was already purchased covered 10% down. So that was our “down payment”.
- We decided to only do 10% at that time. The reason we did this was because 1) we planned to not really owe $382K by some of the savings we did so the 20% down when we go to convert the loan to a 15 or 30 year will be less than $85,000 and 2) we wanted to save some of our cash to be able to float while building.
4) You will also need to pay closing costs. Ours was about $5K.
5) Once you secure the loan your builder can start work and you can start to make draws. Our contract was written that 5 draws would occur after completion of certain steps. (i.e. foundation was poured was one draw, “dried in”- with windows and doors was another draw)
6) Your builder is ready for the first draw. Now what? I suggest praying and also keeping in the back of your mind it is going to take some back and forth.
-
- You’ll need an affidavit….. probably. Our bank required it, but I think if we would have went with a bank our builder is familiar with we would have forgone this step and just turned in invoices.
- We used Kim’s affidavit. (513) 528-7250 She helped walk us through getting the invoices our bank required, changing language so that our builder would sign it, and turned it all around quickly for us. We had to pay her for each affidavit but this was worth it to us.
- On one draw you can request several checks: so we would often have one for our builder, our electrician, our heating/air subcontract, flooring, cabinets, etc.
- You can also have yourself as someone whose getting paid back. Since Kyle did a lot of plumbing and electric work himself we did this often for the materials we bought.
- The bank will come out and inspect to make sure that the portion needed to be completed for the draw was actually completed. So if you take out a draw for foundation work and there was no concrete poured- they aren’t going to give you money. Fairly positive that would be some sort of money laundering thing too…….
7) After you turn in for your first draw, you’ll start paying on interest for the amount you drew. So our payments started out low, $200, and then reached upwards to $2,000.
-
-
- On a side note; construction loans are usually only good for 6 months. If your build goes longer than this (like ours did, thanks Ohio weather) you’ll need to do an extension. It shouldn’t cost any money, just a signature.
-
8) Once you’ve had your last draw and get your occupancy permit you’ll then want to convert your loan from a construction loan to a conventional loan. In full disclosure we aren’t here yet- so I’ll come back and update if the conversion part turns into a nightmare.
Ok I think that is all the knowledge I have. Honestly, it might not even be that great of a help because if I have blocked anything from my memory for this build it is in regards to the loan process.
So to recap: pay for your house in cash and do not take out a loan.
