Some will consider my approach impractical- but it worked for me. I estimated the cost for my new house and looked over the value of my assets. I had enough assets in cash or convertible to cash to equal twice the cost of the house. So we started building. No problem. No mortgage. No fancy car in the garage.

The appraisal is going to be based on sales of similar homes in your area. Which is where the problem is - there are foreclosures everywhere! Check the real estate records to see what's sold, or if you have a real estate agent, I'm sure they can give you some ballpark.

You are right to be concerned. This is a big issue. We had the same issue (building above the market in a small town). What we ended up doing is going with a lender who would finance 95 percent of the appraisal amount. We own the lot outright and are putting in an additional 25 percent or so of our own cash to make it work. The reason the bank is able to do it is that it is an in house loan that won't be sold on the secondary market. They have much more flexibility with the terms.

As far as the expenses, you can research but at some point you just roll the dice. If you are building a less expensive home in a more expensive neighborhood, you are in good shape, or if you are willing to put a larger downpayment if needed. Otherwise, all you can do is look at what homes are selling for in the area in which you are building. If they are selling for less than you need to build (very likely because houses are much cheaper to buy than build), then you may have an issue.

Well our house looks like it's going to appraise for ~125K less than what total cost to build is. We don't live in an area of many foreclosures (maine), but there haven't been a lot of houses that have sold to comp to. Our land appraised for 87K when we bought it last Fall. Our build price is $375K and we have 56K left on land loan, so total cost needed is $431K. We are prep-approved for up to 417K, but would need to make up the difference. The bank will lend 90% LTV, but we're not even thinking about paying the exorbitant PMI.

Our builder is trying to help and assured us that his homes have appraised for close to the build price. If our house appraises for $325K and land is 87K of that, that's like saying the house is only worth $238K. Are you kidding me?! At this rate we'll be 100 years old before we can stash enough money away to do it. It's not a mansion either. 2500sqft log-sided home with modest finishes.

So in the end we have a 3ac plot of land that doesn't look like we'll be able to build. I told my wife we can go pitch a tent on this summer and camp out, but that might be the closest we'll get. Will have final verdict on the appraisal on wednesday, but I'm not that hopeful. Crappy market just isn't helping. Someone did suggest we get appraiser to comp against newly built homes. It's a double edge sword though. Not many new homes being built with the lousy market, so probably not enough comps.

This is where your banker comes in. We had to switch banks from a large bank to a local bank where they had much more control over the appraisers (knew all personally, had specific ones that were experienced in our type of build, etc.), and had a very small pool to work from. Our first appraisal from the national bank came in 400k less than the estimated maximum cost to build (we will be under it but not by 400k). The local bank appraiser came back with a number that was only 600k less. We are not paying PMI on the low loan to value loan either. PMI is only required when the loan is sold on the secondary market. Ours is an in house loan, so no PMI. The local bank really wanted to make the loan, we aren't a risky proposition and they worked with us.

I am a little surprised though that you found a bank to lend you money to build a house when you still owe on the lots. That has been the thing I have heard over and over from folks - that they had to pay off the lot before they could get a mortgage.

If you can find a local lender that holds notes (as opposed to immediately selling them off into the secondary market) they can be more flexible.

Most of the new rules are for the mortgage to be 'conforming' and thus eligible for sale to Freddie or Fannie.

If the bank holds the note they have more leeway.

Exactly, Brickeye. That was what we found - they have great flexibility if they are not selling the note. .

Athensmom when was this that the bank was able to choose an appraiser? We were just at our local bank yesterday and the loan officer said that with the new banking rules, this is not possible.

If the bank does not sell the note, they do have greater flexibility, but they will probably charge a higher rate.

Yes, sort of. They really didn't choose the appraiser but they have a rotation of appraisers and they know who is coming up next. They played a little fast and loose I guess . . . but it made sense to me that the guy that appraises farms (we are in a rural area) should not be appraising my house! They chose the guy that regularly appraises houses similar to what we are building (architect designed, custom builder, etc.)

As far as charging a higher rate, our experience has been the opposite. At least at SunTrust, where we got our first low appraisal, our mortgage was the best one they offered - lower rate, lower downpayment, all sorts of perks - but had specific net worth requirements, a requirement that you have a large amount of cash on hand, a credit score above 780 (or maybe 760), etc.

"They really didn't choose the appraiser but they have a rotation of appraisers and they know who is coming up next. "

They only have to follow the 'arms length' rules if they want a conforming note.

Just closed on our build on Thursday. The appraisal was for $65,000 less than our cost to build. So our 20% down payment was then 13% just over the banks cutoff for a primary and secondary loan. Looking at the appraisal report there was a lot of information. They do not care about any square footage below ground whether finished or not. They gave $10,000 for 1000 square feet of finished square foot of one of the comps which had probably $60,000 in finishes. They gave $15,000 for the difference in acreage between my land and the comps. The comps had .5 acres. We have 1.2 acres and acres go for $100,000 where I built. They gave no adjustment for my two covered porches. Crown molding counts for nothing in money. Formica and granite are the same cost to the appraiser. He gave no difference for my geothermal versus gas furnace. Hardwood vs carpet is no difference. They just look at finished square footage for comparison. I got luckily in one of the comps were originally sold for $1.2 million in 2004 and sold for $885,000 recently.

We have the same issue crazy_in-mason. Although our second appraisal came in much closer, we are still under. The first did not take into account our terrace and screened porch (raised because we have a walk out basement so lots of steel and concrete, and a fireplace on the screened porch), the quality of our finishes, our acreage (they counted it as a lot in our subdivision, but we bought two lots so we could have 2.4 acres and they refused to make any adjustments after we brought it to their attention).

It was not helped by the fact that we had an appraiser who made numerous errors in the appraisal, including the above, but also missed 1000 square feet of heated square footage, 500 square feet of unfinished basement, 1 full bath, etc., etc., etc. We found there is really no recourse. . . The loan officer was a complete burn out as well and was the pits. We had much more luck with a small, local bank.