Construction loan questions

tn1978

14 years ago

I didn't want to hijack the other posters constructon loan question.

We are just about ready to shop around for a construction loan and have a few questions. Are banks still accepting land as only down payment, or are they wanting some cash too? Land is paid off, and was valued at 76k 5 years ago(don't know what it is worth today). I understand that the home equity is calculated based on Final home value - mortgage value. As long as that is greater than 20 percent, we should be good, correct?

What is a fair closing cost % estimate? There aren't many calculators for closing costs on construction loans. This is in PA.

thanks in advance

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Comments (7)

manhattan42
14 years ago
I'm in PA also and lenders in my region of the state are still only considering giving mortgages to those who can cough up 20% cash against the cost of the house constuction IN ADDITION TO the value of the land being fully paid for completely.

Example:

If one owns a free-and-clear-paid-for $40,000 lot and wants to build a 300,000 house, the lenders are STILL requiring 20% of $300,000 or $60,000 cash down PLUS the FULL LOT VALUE ($40,000) as collateral against the mortgage.

Doctors, Lawyers, Accountants and other professionals are having a hard time qualifying for mortgages under these terms and few builders are building because their clients can't qualify because of the tight banking regulations.

If you are NOT in this exclusive club and can NOT afford more than 20% down and have a free-and-clear lot....then you don't stand any chance right now of getting a mortgage in Pennsylvania under most circumstances....

Sorry.
msavold
14 years ago
It's definitely *weird* out there! Building in DE (with funds from a major east coast lender that unfortunately does not seem to serve PA - just checked their web page) we've been assured that our lot value *does* count toward the 25% (note, not 20%) down that they want from us.
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I have issues with the EXPLANATION your builder tried to give you regarding the 5% deposit he is asking you to pay to him. He says this provides the bank with extra security... HUH? How can your giving extra money to the builder possibly make the bank more secure???? Yes, banks want you to have skin in the game but I suspect that bank would much rather have that extra 5% of yours in a deposit account in their bank ready to pay out to builder once he has earned it than in builder's pocket before builder has even broken ground. And, it actually sounds like the 5% is going to have to come out of your loan amount rather than out of your pocket now. If so, what builder is actually asking for is a 5% draw from the bank before he ever does any work. NO WAY! The last thing banker's want is for builders to get any of bank's money BEFORE they earn it. Getting money upfront (before work is done) is how shyster builders operate. They are the ones who then disappear leaving you with a half-built house and not enough money left in the bank to finish it...which often forces the homeowner to walk away leaving bank owning the half-built home. If builder had said something like: "the 20% down is to purchase the land. You will then own it outright and I will give you the deed for it immediately. That means that, if you then decided you wanted to, you could walk away from me and go find someone else to build your house on the land. So I want an additional 5% deposit to ensure that you'll stay with me and let me build your house because otherwise I don't want to sell you the land." Well, that would have made sense and at least sounded honest. (That is, assuming the land without a house is actually worth that 20% and you could build the house you want for the remaining 80%.) But "pay me an additional 5% because it will give the bank more security" is, IMHO, pure flim-flam! And, if builder will attempt to flim-flam you at this point, he'll do the same thing repeatedly over-and-over again as the work progresses. Frankly, this is a red flag that should make you wonder if you even want to get into a contract with this guy at all. At the very least, ask your builder - in the presence of your banker - to explain to you EXACTLY how your putting more money into buider's pocket before he actually does any work for you is somehow going to make banker feel more secure. And then ask your banker if he agrees with builder's explanation.
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I talked to a couple of banks. We have used Wells Fargo for our last two mortgages. They will not do a land loan at all, they would do construction but not until we sell and they would require a substantial down payment. I talked with a local bank that would do a combined equity line on existing home and land loan. The land loan would be amortized over 20 years with a 5 year balloon. Not a bad option. At this point I need more info, need to get a realtor in to see what we can put our existing house on the market for, need to get some numbers back from the builder I am looking to work with, and a second builder to get a cost comparison. I am hearing that things like concrete are through the roof right now? But who knows. I plan on doing a lot of work myself, insulation, painting, floors, cabinets, much of the trim, my dad is going to do the electrical. Hoping I can make the numbers work.
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My husband and I ran into a similar problem when we had our big addition/remodel. What my husband did was contacted both the bank and the appraisal company and showed them our building plans and asked that they base the appraisal on the prospective build out. The bank worked with us. The residential lending officers actually visited our home on three separate occasions to ensure that we were in fact upgrading the home to the level we proposed we would, understandably they needed to ensure their money was going where it should be. So about midway through the project they increased our construction loan by 25,000, and 3/4 into the project they gave us the final 40,000 they agreed to lend us. This was still about 25,000 shy of our desired amount. In addition to our discussion with the bank, we sat with the contractor and asked where we could cut some corners. He offered us the opportunity to do some “homework” throughout the project which included cleaning up the work site at the end of the day ourselves and preparing the area for the following day, drilling holes in the framing to save a ton of time that we would normally pay the electricians 125 per hour to do, and the biggest savings was painting the house ourselves. You may not have the time or desire to do this much hands on but I gotta day not only did we save enough to complete the project, but we came in under budget enough to furnish a few of the rooms. Best of Luck!
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creek_side
14 years ago
Don't just shop banks. Talk to credit unions, also farm credit agencies, if you are in a rural or semi-rural area. You don't have to be a farmer to use a farm credit agency.

We went through a credit union. We didn't even consider banks or mortgage brokers.
insijs
14 years ago
We closed in Aug. One time close with construction converting to permanent 30 yr fixed. We paid off the rest of our land with the first draw.

Ended up doing an 80% first and 10% 2nd mortgage. It's important to get approved as high as you can up front which we did.

Origination portion was $500 for the construction loan and $500 for the permanent. None of this 1% origination stuff others wanted. Can't remember all our closing costs right now but they were very reasonable.

We extended our construction loan twice and and our lender was real cool to work with. Local bank and great title company.
tn1978
Original Author
14 years ago
Follow up for anyone looking for a construction loan.

We were able to get a construction loan with no cash down payment other than lot equity. Closing costs are around 5k. Less than 2 weeks to get approved. There is money out there if you look. This was a local bank. We decided not to lock in now, since they wanted a refundable 1 1/2 points at closing to "hold" the 30 year perm mortgage. The lock in rate was not that great, so we will wait out the market.
athensmomof3
14 years ago
We talked to several lenders and all would allow the use of the lot (paid for) to be credited towards the required downpayment. For us that was 20 percent, but I understand that depends heavily on how much money you are borrowing and whether your loan is conforming or jumbo or "super jumbo" . . . We are in Georgia.
creek_side
14 years ago
We were able to get a construction loan with no cash down payment other than lot equity. Closing costs are around 5k. Less than 2 weeks to get approved. There is money out there if you look. This was a local bank. We decided not to lock in now, since they wanted a refundable 1 1/2 points at closing to "hold" the 30 year perm mortgage. The lock in rate was not that great, so we will wait out the market.

Try a credit union. We got a lock in at 0.5% with a very good rate.

Construction loan questions

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manhattan42

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manhattan42

msavold

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