Financing / Home Construction Loans


Below are some of the results from the "Ask George" files for Financing and Home Construction Loans.

More Information on Construction Loans can be found on the Home Construction Loan page.

These questions were submitted thru my contact form which can be found on the "You Can Build Your Own Home" Ask George Page.
   
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Financing Home Construction Loan
Financing Home Construction Loan, The "Ask George" Files Financing Home Construction Loan
From David:

Thanks for all of this wonderful information! I should pay you a consulting fee for helping put me on track to saving money and building equity (once I do it anyway!)

You've provided a lot about financing for construction. These all in one package builder people (one I've found anyway) boasts 100% no money down financing for the whole construction process as long as there is an approval for end loan in place and the total cost to construct comes to 80% of the final appraised value.

This sounds great - however they are reluctant to release the name of the bank. I'm sure I'll find out if I used them - but I'd like to know the name of the bank if possible and refer it to my mortgage broker friend.

Anyway - I wondered if you knew the name/contact info on any of these banks DIRECT that would offer this type of 100% no money down construction loan considering that we have equity when the project is done.

Your response is appreciated.

Response:

Hello David,

I used Regions bank. I owned my property and that was collateral for the loan. I had 30% equity when I moved in.

I am not sure if they do 100% loans.

Hope this helps,

George
Financing Home Construction Loan
Financing Home Construction Loan, The "Ask George" Files Financing Home Construction Loan
From Stephen:

Hello George , my name is Stephen XXXX. I want to build my own home ; but , I am experiencing road blocks from banks . The banks want a licensed general contractor to co- sign with me . Are you aware of any lenders that do not require this in pa.

Response:

Hello Stephen,

Financing can be a challenge when you build your own home. We went to several banks prior to finding one we thought we could work with. We used Regions bank.

I wrote a newsletter a while back about the subject that may help you I have attached a link to this e mail.

Home Construction Loan Newsletter

Don't let the bankers get you down. You just need to find the right bank. Remember preparation is the key. If you go in prepared and they think you know what you are doing you can get the money you need.

Hope this helps,

George
Financing Home Construction Loan
Financing Home Construction Loan, The "Ask George" Files Financing Home Construction Loan
From Jane:

Hi George

Just got my first issue of your newsletter... I really got a lot out of it.

I wondered if you have any advice when it comes to financing/loans for the building and purchase of land?

I'm just starting my research and am excited about the idea of building my own little house.

Thanks so much.

Response:

Hello Jane,

Sorry about the late response. I have been swamped since the first of the year. :)

If you haven't reviewed the Construction loan page you may want to. It covers many questions you may have. Here is a link Home Construction Loans The possibilities for financing are pretty much endless. So go have a look and write me again and I promise I won't take so long to respond.

I used a conventional bank to do my financing. By the way you may also like to review the back issues of the newsletters. I know I have one that talks about approaching the bank. Here is a link to the back issues You Can Build Your Own Home Newsletter Back Issues .

The biggest piece of advice I can give you is take your time research and don't get discouraged.

All the best,

George
Financing Home Construction Loan
Financing Home Construction Loan, The "Ask George" Files Financing Home Construction Loan
From Eric:

This site is awesome! I love it, and it's free!!!

Don't know if you answer questions or not, but just in case...

I didn't see anywhere in here where you discussed the (possible) requirement of involving someone with a contractor's license (ie. a certified residential contractor). I've heard this is required by lenders, and required by municipalities.

Just wondering what you thought. Thanks!

Response:

Hello Eric,

Thanks for the compliment. All are appreciated. :)

Many lenders prefer you have a GC (General Contractor). I am not a GC and I found a lender. You need to prepare before you approach them carefully. Take the time to figure out what it will cost to build your home in detail. You can find more info on the website. Read and Read more about the process.

Some municipalities will give you a building permit and some won't, you need to check before you buy the land. The town I built in really did not care. The county required a septic system permit and a plan and the town gave me a permit.

Hope this helps,

George

Response from Eric:

All information is helpful. Thanks for replying!

Where we're thinking of buying / building, I can forgo using a licensed residential building contractor provided that I appear before "the board" and provide an affidavit stating that I'm building the home for me, and not for someone else (ie. for profit). Only caveat is that if I move within two years they could fine me for violating the agreement.

I'm still trying to figure out the lending portion of the work. Perhaps they'll require a licensed builder?

I'm a project manager for a large municipal general contractor. What I do at work now is nearly the same thing I'll need to do at home to build my own house. Perhaps that would count towards something with the lenders. Plus I'm a Civil Engineering graduate and will possibly have my PE License by the time we begin building. All those little things may add up.

Response:

Hello Eric,

Sorry for the late response. Your return mail got lost in the avalanche I get daily! :)

I used Regions Bank. The more prepared you are when you approach your bank the better. Have as much of your costs worked out as possible. Approach it like you are building and you are giving them a chance to finance you. Lay your whole project out and be ready to answer as many questions as possible. You are going to have to do all this work anyway ie.. finding contractors getting bids, plans, land, costs for everything...

I don't have a license and they financed me. You just have to find the right bank and they have to feel comfortable loaning you the money.

Hope this helps,

George
Financing Home Construction Loan
Financing Home Construction Loan, The "Ask George" Files Financing Home Construction Loan
From Lynne:

I recently filled out your form for construction loans. I received a call from Indy Mac. We were thrilled. The only thing is that they said that we have to have a general contractor. If this is true why do they advertise on your site? I thought this was a way to bypass the general contractor. Anyway, now I need to know what is involved in getting a GC licenses. We live in Texas. Thank you

Response:

Hello Lynne,

I have heard a similar report about Indy Mac from another reader in Texas. I am not sure why they advertise on the site if they have that policy. If I recall the other reader said they told them it was not legal in Texas to build a house without a GC. I have never heard any other bank with this policy.

You need to keep looking for a bank, trust me there are many options out there. One of my readers used Union Planters bank which is now Regions in Texas.

Don't let the bank steal your dream! Press on and find your money.:) Bankrate.com has a huge amount of information about loans and lenders go look at that site and research.

Merry Christmas,

George
Financing Home Construction Loan
Financing Home Construction Loan, The "Ask George" Files Financing Home Construction Loan
From Rego:

My wife and I want to buy land a build our own home but we do not know where to start as far as our credit is concern. So we are saving up all next year to come up with at least 15+ to get started on building our dream home. If there is any information you can send us we will greatly appreciate it and thank you for you time.

Response:

Hello Rego,

When we built our home we took a similar approach. We spent a solid year looking for the right property, then we bought it and developed the land for 6 months then we built.

Building your own home is a totally different from the normal way that we are accustomed to. Normally we find a house and we buy it. Now you are responsible for all the decisions. This can be overwhelming up front but if you take it step by step it becomes possible. An old saying that is brought to mind is " How do you eat an elephant?" The answer is one bite at a time. The home building process is the same.

During the time that you are saving your money you can do all your research and then when it is time to build you are prepared.

PS. Don't be discouraged if your credit score is not perfect. Yes, it will make your search for money more of a challenge, but you can find the money. Start by educating yourself. A good place to start reading about loans and how they work is on Bankrate.com. There is a lot of good information on the web if you take the time to search for it.:)

Happy Holidays,

George
Financing Home Construction Loan
Financing Home Construction Loan, The "Ask George" Files Financing Home Construction Loan
From Kathi:

Is it possible to get a 100% advance on a construction loan? Basically one draw at 100% of the loan amount?

Response:

Hello Kathi:

I have not heard of a construction loan that gives you 100% of the money up front. If you own an existing home and have significant equity you may consider a HELOC (Home Equity Line of Credit). Use the equity in your existing home to build your new home and then sell your existing one. I have not done this but have had people write me about this type of loan for building.

All the best,

George
Financing Home Construction Loan
Financing Home Construction Loan, The "Ask George" Files Financing Home Construction Loan
From Scot:

George Your information is very informative. I am now thinking about being my own General Contractor. I do have had a few credit problems in the past which could make a construction loan difficult. I found a site on the web it is www.iheonline.com that offers construction loans with no payments for the first year but you can only use their suppliers of panelized homes etc. Do you have any experience with companies like these? If so good or bad?

Response:

Hello Scot,

I really don't have any experience with that type of program. I have though heard from readers that you must be careful that they don't mark up the cost of materials excessively. Be careful!

Try different banks and loan institutions. Don't give up if you are turned down a couple of times.

Good luck,

George
Financing Home Construction Loan
Financing Home Construction Loan, The "Ask George" Files Financing Home Construction Loan
From Thomas:

Hi, I just subscribed. I am thinking of getting a home equity line of credit to finance my purchase of land and home construction. I have enough equity in my present home to do this. Should I do this or look into a construction loan?

Response:

Hello Thomas:

I am not a financial advisor, BUT I hear tell that equity lines of credit interest rates have been going up....have you compared the equity line of credit interest rates (which are variable) to fixed home construction loans rates? That equity line of credit may be a negative when qualifying from your construction loan. Yes, owning your land is a real plus prior to applying for the construction loan, BUT it can alter your credit score if debt was incurred while buying it. You must consider all sides of the equation.

By the way, have you found out what your credit score is? Now is the time to find out....not when you are applying for a loan. There may be stuff to clear up....now is the time....I am lucky...my wife is the brains of the family...she does all of that stuff for us...keeping me out of trouble....

Debt is debt....don't make sudden changes to your debt picture before comparing what this money is going to cost you both in terms of your credit score and the interest rate.....you have got to quality for that construction loan....come hell or high water. So take a little time here....and maybe review credit tips on www.bankrate.com

By the way, just like a home equity line of credit...we only paid the interest each month on our construction loan, not the principal....and yes, we had a large amount of equity in our last home, but I applied that money to our build your own home at final closing and knocked down the principal. The construction loan made us tow the line....I eliminated all wiggle room and kept us uncomfortable to force us to stay in budget. It was hard at times, but we made it successfully, saved a bunch of money, and I am really proud of our home.

I really believe deep in my bones that building your own house, and managing your own construction budget is the only way to get what YOU want. Yes, it is not easy, but IT IS WORTH IT!!!

All the best,

George
Financing Home Construction Loan
Financing Home Construction Loan, The "Ask George" Files Financing Home Construction Loan
Mr. Stevens,

I really love your site. It is so informative. I would like to build my own home. I moved to NJ from Delaware 4 years ago and went into property tax shock. I owned a home in De and only paid $1200 yearly. For a similiar size home in South Jersey the taxes would be around $8000 yearly. So, I purchased a resale townhome. My home in De was built by a builder and their were many quality issues in every aspect of the home. I would like to have control of the quality of my new home, save money to off set the taxes, get the floorplan I want and features I like by carefully selecting my own contractors. My question is about construction loans. If I can afford to finance my own home thru my high credit lines with low interest rates and savings should I do it that way to save money and get the deed to home then get a home equity loan with no or minimal fees then pay off my credit lines and get my savings back. I did that before with my townhouse. It seems like that estimated $700 interest a month that is accumulated from draws could be used to get upgrades in my home instead of money in the banks account. Also, Indy Mac requires that owner/builders hire a site supervisor. Isn't that more money that could used on the quality of my home. Do all construction loans require a site supervisor? I was planning on hiring my own inspector and a lawyer for contracts. I would really appreciate your thoughts on my alternative financing to save money. Thank you.

Response:

Hello Karen,

First I would like to say building your own home is a great way to control the quality of the construction. It does however require a huge time investment, and is not for the faint of heart. That is why some people do hire a building supervisor to take some of the load off of them and give them good advice. If you find the right one it can really be an asset in the building process. I talk more about this on this page Home Construction Option #2. Really take some time and consider before making a decision.

As to financing your project, again every situation is different and everybody has different finances. I used a conventional home construction loan through Regions bank. I could have financed it myself but it would have stretched our finances significantly. I have gotten emails from several people that built their homes using the same financial strategy that you are considering. I do however have one recommendation. Make sure you have plenty of time to build. You want to make sure you can go the distance financially. Many things effect your timeline when you build. The availability of contractors, weather, materials, location etc... Building a custom house takes minimum 6 months and sometimes upwards of a year to build. Just make sure you can go the distance financially. Once it is finished you have a great asset to leverage against. Before it is finished nobody will loan you any money against it.

You are wise to get legal counsel before building and make sure you have your bases covered. Also having an independent inspector is a must in my opinion. They really can point out things you will miss.

If I can leave you with one piece of advice it is slow down and do research before you make a decision. Time invested prior to building is so important.

Hope this helps,

George Stevens
Financing Home Construction Loan
Financing Home Construction Loan, The "Ask George" Files Financing Home Construction Loan
From Christopher:

Hi there--I hope that you can help me. I have researched your website for 5 months now and we are ready to build our house. My question is---when we went to the bank to get our interim loan they said I have to have a builder because it was conflict of interest for us to build our own home. Can you help me with some ideas on what to do?

Response:

Hello Christopher,

That is a strange comment from the bank. Actually it is the first time I have ever heard someone being told it is a conflict of interest. How could that be. It is your house, and you are building it to live in it. How is that a conflict?

Sounds like you need to visit other banks for more than one opinion. Remember you need to check several sources to find the best deal for you and your family.

I live in the Houston area, and we see banners hanging on banks around town offering Owner Builder loans.

Hope this helps,

George Stevens
Financing Home Construction Loan
Financing Home Construction Loan, The "Ask George" Files Financing Home Construction Loan
From David:

Questions... where do I find an entity that will loan on a scenario like this: So let's assume you reserved a home for $150,000 in a State that has a 12% appreciation rate. It takes six months to complete the home and you put down $2,500 - $30,000 to reserve the home/building. During the six months you do not make any payments, as you would not obtain the loan until about a month before the home is finished. During the fifth month the builder calls the lender (or the buyer) and informs them that the home will be finished in another month. The loan process starts and takes 30 days, for example. 

The home is complete on the 30th and the loan closes on the 30th and you start making payments on the home most likely the following month. Since your home's market value now has increased by 6% (appreciation), your home is now really worth $159,000 and not $150,000 anymore. However, the lender will not accept the new market value, even if the builder is selling his new phases for the increased price. This has positive and negative effects on your loan. 

The negative effect is that you have to qualify for 80, 90 or 95 or even 100% financing for the total value of $150,000. The positive effect is that you already have built equity into the home. This might not be important immediately, but as the new phases are being completed, your new $9,000+ equity will come in very handy when refinancing down the road. Look at it as a "safety" factor for you. 

Note: You can generally not advertise a home for rent until it belongs to you, which is not until your loan has been approved. This may cause your home to stay "empty" for a week or two, depending on how aggressive you or your property management company is in renting your place out. Your lender will generally want you to have six months' worth of mortgage payments in the bank. That's where OPM might come in handy. I am looking for an entity that will loan the down-payment portion... Any suggestions?

Response:

Hello David,

The timeframes you refer to are a little exact when building a home. When we built this house as soon as we closed it rained for 2 months almost everyday. I could not get a heavy truck to the jobsite. Things happen that can really delay you. You have to allow a time cushion for building in case something goes wrong.

It sounds like you are trying to borrow 100% of the money to build. The banks will make you take out PMI (private mortgage Insurance) to protect them if you default. That will add significantly to your loan payment.

We built our home and had 30% equity when we finished. The bank loaned us enough to build the home, essentially our down payment was built in to the loan. We did own the land that we built on, this made us more favorable to the bank.

There are many ways to raise money, but if you borrow your down payment from a lending institution it will show up on your credit report and have a negative effect on your building loan approval.

Hope this helps,

George Stevens


Financing Home Construction Loan
Financing Home Construction Loan, The "Ask George" Files Financing Home Construction Loan
From Shawn:

Did you run into anything when stating that you were going to build the house when dealing with the loan. The loan officer is asking me if I have a contractors license, I told him the point of a owner-builder home was that I was the contractor. There seems to be a disconnect, he's looking for a contractors license.

Response:

Hello Shawn,

All banks are not open minded about building your own home. I used Regions bank. I also talked to Amegy bank and choose Regions because they had better rates.

When I approached the bank I had my plans and my contractor bids and a detailed plan for the loan officer to look at. I stressed to them that I was using licensed contractors to build the home and showed them who I was using.

Much will rely on your ability to present your plan to the bank and your credit rating etc...

Hope this helps,

George
Financing Home Construction Loan
Financing Home Construction Loan, The "Ask George" Files Financing Home Construction Loan
From Forester:

Dear George,

I will be glad if you can answer the following question for me?

  1. Will the bank give me the money to pay the contractors if I should get a loan?

  2. Who chooses the materials for the project? The contractors or me?

  3. Who buys the materials for the project? The contractors or me? Will the contractors give me a list of things needed if I am the one who buys the materials?]

Response: 

Hello Forster,

Sorry about the late response I get behind answering all the e mails.

The Bank will give you the money in draws that are preset at different stages of completion. They give you a draw schedule that lays this out. They will send an inspector out at each completed phase of construction and he or she will take pictures of your house and fill out a report and give it to the bank. When the bank is satisfied that you have completed that phase they will cut you a check for the next draw. This is explained in more detail on the Home Construction loan page, here is a link Home Construction Loan Page.

Building materials are supplied by you in some instances and by the contractor in other instances. When you build your own home you select contractors for each phase of the home building project. You can review this on the Home Construction page

You will notice that I have bolded the building contractor that is responsible for each phase. For more on building contractors you can go to the Building Contractor page.

Each phase of the project will have it's own necessary building materials for instance Framing will require framing lumber and fasteners (nails). Traditionally the framer provides the fastners and you provide the lumber. Let's look at another phase of the home building project for instance the foundation. This can go either way you can bid each individual component of the foundation or have the whole foundation built complete (turnkey) for one set price. If you bid it turnkey normally the contractor will supply the materials. This is also discussed on the Home Construction page.

It would be a good idea for you to read each page of the site starting at the first link at the top left of the page and follow each thru the process. This will give you an idea of the whole process. Don't rush this, take your time and learn as much about the process as you can.

Hope this helps,

George


Financing Home Construction Loan
Financing Home Construction Loan, The "Ask George" Files Financing Home Construction Loan


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