Friday, June 3, 2016

Diary of Building A House: New Construction Loan (The Down & Dirty)

Updated on 2/22/2017
So let me start by saying, "There's a reason people warn against doing a new construction loan". The process is tedious and can be daunting, to say the least. Although, it's all good- just expect it.

I wish I would've been better prepared with the real details of what we needed before I even spoke to the bank because, they (The Bank) can't do anything until you have all of your ducks in a row. ( This is assuming you have been at least pre-approved for the purchase amount you want to finance.)
I've had some emails asking about the details of the loan process so I thought I'd post about it, however, since this is super boring if you're not building a house, let me redirect you to our PINTEREST page for your viewing pleasure. :) CLICK HERE FOR INSPIRING HOME IDEAS 

In the first post, I got to the basics about prepping all of the estimates. Now let's talk about the reality of just how much money you'll likely need to gather. ( I'll add some photos of houses to keep the warm and fuzzy vibe going. hee hee)

In our case, we sold our house with the goal of taking the equity/profits as down payment for the house we wanted to build. This meant that we had to lease a place to live while the house is under construction. So with that said, have to consider current living cost plus taking on the needs of the new house.

So PRIOR to closing, here is an example of the cash requirements that needed to be met:
(Keeping mind, this is only what I have experienced doing a conventional, 30 year,  adjustable after 36 months, new construction loan. (The rates are so low right now. Even the max adjustable % rate after the 36 months is very low) We purchased the land first and closed on the land. This can be good if you need a little extra time to work through the process and site work. We actually had most of the site work done before we closed on the final loan.

1) All of the normal loan stuff, credit check, income verification, tax docs etc.
2) The bank will loan 80% of the appraised value. The rest you'll need to have cash down.

  • We paid cash for the land and closed on the land loan first. The cash that we put down for the land was able to contribute towards the cash needed for final loan.  As a (not my house price) example: If you purchased the land for 100k and paid cash, and your total house loan including land is $500k, the bank would give you 80% of 500k= 400k, you'd need 100k down. But since you already paid 100k cash for the land, you would not need to put any more money as a down payment.
3) We needed to show the estimates for the line items on the "Cost to Build" form. (see post 1) - Understand that this form is only a very, very small part of what the cost actually is. There are so many things missing from the Bank's "Cost to Build" form. I'm shocked they are missing so many details.  I also printed around $300 worth of full size plans to share with contractors in order to get estimates.

4) You need an appraisal from the bank. The appraisal is based on your house plans, finishes, features and sq footage. 

5) In addition to the 20% down, you need to show (as in, show in the bank) an available 10% of the total cost to build as "cash reserves. The bank will ask for copies of proof of the funds available. The bank holds back this last 10% of money until you get a Certificate of Occupancy, the house is finished and inspected by the bank. This seems like a kick in the pants but here is my advice; "You'll need a heck of alot more than 10%, so be prepared. Facts." There are no amount of spreadsheets in the world that can prep you for the costly things that come up.

6) Pay for a septic design and permits and show proof of approvals. ($1k +) * If you're on town water and sewer, you'll be happy to skip this step. 

7) Acquire a building permit, which included more taxes and town fees. (This is in the thousands)

8)  Need to draw up a contract with your Builder, GC and references for both, plus cert. of insurance.

9) The bank also holds back the funds for the last 15% of the total cost until the house is completely finished. That means you'll need to front that money to finish the house, get your certificate of occupancy, and THEN the bank will fund the final 15%. Oh, great. More cash needed. This is why Builders hold things like shower glass, mirrors and such until the last minute. It's like, what can I charge on a credit card to get the house finished and then pay myself back once the bank funds the final payment. 

Well, HELLO there Debbie Downer, yes you'll need some flowing cash. The 20% down payment quickly becomes the least of worries. I can tell you, I was so not aware of this and I did not read about these shenanigans on the interwebs anywhere. But thankfully, we pulled that out of who knows where, and got it together. And now we forge onward, with lots of coffee. 

 There's no turning back now. 

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