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Your Name Doesn’t Have to be Bob to Build a House; the Big, the Bad, the Ugly and the Get it Done

May 03, 2018 - Posted by: Rocky Mountain Credit Union

 

If you are looking for an extra bedroom, more bathrooms to clean, a mother in-law suite above the garage, or some other configuration you are not finding during your search for a new house; the answer may lie in building a house. Deciding on this course of action involves different steps than buying an already completed home.

Whether you are looking for a completed home or a new build, financing is something they both have in common. You should start by gathering your financial information when applying for a home loan or a construction loan. Organizing all your information before any loan application will save you stress and time. Having all documents completed and in one file will allow you to meet requests which may vary from one lending institution to another.

Get Necessary Stuff  to Break Some Ground.

  • Prove your income by providing W-2s from at least two years and the previous year’s tax return. If you are self- employed tax returns will be necessary for at least a two year period.
  • Lenders are looking for assurances that you have a consistent income. If you are a contractor or freelancing and being paid irregularly you might have to submit a payroll schedule. Many times profit and loss statements are also required. If you do contract work bring any 1099 forms.
  • Even though you are furnishing copies of tax returns, some lenders may want to see copies from the IRS. This is accomplished by signing IRS Form 4506-T.
  • A paycheck stub will provide information about your employer and proof of your income. In general this will need to be no more than 30 days old. If you have direct deposit allow time to receive assistance from technical support in case there is a glitch downloading and/or printing this information.
  • If you have other sources of income, documents to verify their existence will be necessary. If you are receiving alimony or child support a copy of your divorce decree will be needed. Perhaps you have income producing rental property. Have a copy of the lease agreement in your file.
  • If you have had a bankruptcy within the past 10 years you will need to provide a copy of the discharge papers. This proves those debts were settled.
  • Monthly statements from your financial institution(s). Direct deposits from your employer will show on these statements and so will other sources of income. Social Security payments and other payments from retirement accounts will also be included in this statement.
  • Lenders will be looking to verify that the down payment is coming from your funds and has not been borrowed from another party. If the down payment was a gift be prepared to furnish a letter that states this fact and no repayment is expected.
  • Itemize all your debts. This should detail the name of the creditor, account number, payment schedules, and anticipated pay off dates.
  • Itemize all of your assets. If you own it free and clear include it in the list. This could be a car, a boat, vacation property, etc. Copies of titles, estimate of current value and sometimes pictures will be necessary. If you are a collector include the collection as well. Collections such as art or antiques are not considered easy liquidity but do build a picture of your assets.
  • Retirement accounts such as a 401k, 403(b), Simple IRA, Roth IRA, Pensions, etc. are a large part of your assets. This list should include what institute(s) holds the account, current balance, and the amount that is being added monthly and/or yearly.

 Know your credit rating.

Avoid being surprised during the loan process. Request your credit history in advance so you can fix any errors. Your credit information is available from all three agencies.  Perform a check once a year. This will not affect your score and is free of charge. Check in will all three bureaus, Trans Union, Equifax, and Experian. Don’t forget to ask for your FICO score.

How much house can I build?

Lending institutions use a formula(s) to determine how much mortgage you the borrower can access. The variables used in the formula include your income to debt ratio, credit rating, down payment amount, lending rates, and length of mortgage. 

The lender is taking on more risk when financing a new build. This extra risk requires more of a down payment from you. The percentage is usually 20% – 25% of the estimated loan.

The lender wants to know, what is the loan going to cover? Is the property already owned by you? If not the loan amount will consist of purchasing property, a construction loan and then a mortgage loan. The lot or acreage where you are building is this already owned by you? If so, this will reduce the amount you are borrowing with the added benefit of becoming equity.

Building in a development.

If you have found a housing development with a location you like these often have an approved builder or builders for the specific development. This is called production development. What these builders can offer are several home styles and layouts for you to choose from. Other choices you can make will allow additional personalization. These choices may include exterior finishes, room size, window details, flooring, cabinetry, landscaping, and many more. This type of new build is a bit easier and will require fewer steps than a custom built home.

 The custom built home.

Often constructed outside of a development, custom built homes use a licensed architect that considers variables like lot layout, existing trees, etc. when designing your personalized home. Contractors, subcontractors, materials decisions, and scheduling have to be managed.

What is a construction loan?

Construction loans are usually short term loans about a year in length. Typically payments are on interest only and then for the amount that has been released from the loan. What this means for example is, if you have been approved for $200,000 on your construction loan and the amount of your first release is $20,000 then the payment is the interest on $20,000 not the full amount.

Rates on construction loans are tied to the prime rate and move up down just like the prime rate. For example if the prime rate is 4 % and your loan is set to the prime rate plus one, you will be paying 5% interest. This payment is monthly and will start on the smaller side and become larger as more money from the construction loan is used.

Construction loans also mean additional steps in the paperwork process. Lenders want to know the builder is qualified with licensing and an established reputation. Specifications on the home will need to be submitted. Floor plans, materials to be used and anticipated completion dates for each phase will be expected.

The lender will submit this information along with information about the land to an appraiser.  Assembling this information and comparing it to other homes built in the area or region the appraiser will estimate the home’s value upon completion.

Accessing the loan.

When the loan is approved you will start to receive the money at scheduled times. These are called draws and coincide with various construction steps like having the land cleared, bringing in electricity, determining the water source, installing the septic system, digging the foundation,  framing of the house, and all the way to the end with finishing trim, paint, and a roof.

The number of draws, the amount of each draw, and final payment upon completion are parts of the negotiating process between the lending institute, the builder, and you the borrower. Inspections are often required after a certain step has been completed and before the next draw will be released. This is a type of quality control protecting the lender and you the borrower.

Can we move in yet?

When the house is done a certificate of occupancy has to be issued. All final payments to the contractor(s) are made. The contractor(s) then releases any liens. You the borrower roll your liability into a mortgage. Many lenders combine these two loan processes into one, called construction-to-permanent financing or a one-step loan; this often means closing costs are assessed only one time.

Are you buying or selling a home? Download our guide to everything you need to know about the mortgage process and then some

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