Red flags abound: - A newly built house, even a modular, isn't likely to be less expensive than an existing house (much less a "foreclosed shack"). I think you're using some fuzzy math here; for example, you may have underestimated costs in some places. The world just doesn't work this way. - If the FHA people won't loan you any more than the house + 10K, you shouldn't try to stretch yourself farther. Borrowing as much as the bank says you can borrow typically ends with you being house poor ... and you're talking about borrowing more than they say you can afford. - When you talk to the bank, you will have to disclose any other loans you're carrying. If you're doing an owner-finance deal, you must disclose it. That will change your finances and very possibly decrease the amount they're willing to loan you. - What you don't say speaks volumes: You don't say how much cash you have to put down. If the answer is "nothing much", you really can't move forward on this project. My best suggestion: Save. Work, scrimp and save, and then come back and buy the land outright in a couple years. THEN you'll be ready to build the house, and -- yes -- it will still be available. Once-in-a-lifetime deals aren't real.

To protect yourself you should educate yourself *before* you make any big decision. It would be a good idea for you to know the market value of your home-based on the 'sold' prices of homes like yours in your neighborhood. The situation you are talking about - with homes selling after a long time on the market, way below their asking price reflects sellers/agents not pricing the homes correctly for the current market. The builder you are meeting with sounds like a large one, they may have their own agents who will do a market analysis on your home to find out what they could likely get out of it. For them to take the risk of owning your home and the hassle of re-selling it they need to make some money. If they do not make 'much' on the sale of the homes they take in trade then you have to look at other areas where they are making their profit. Some builders will offer you financing-they may make a great deal of their profit from this avenue of income. You really need to shop other loans and compare fees, interest rates, loan structure etc. We had some problems in our area with builders offering financing packages to buyers with their 'preferred lenders'. The loans were above market interest, had higher fees and prepayment penalties. The builders in question offered incentives to their buyers to go with the preferred lenders-they would knock several thousand dollars off of their asking price, which of course was not a 'real' savings just a way to get a buyer to go with their loan program. When such loans are sold to larger banks the originator of the loans gets 'back end' money in addition to their up front charges because the terms favor the lender vs the buyer. Finally, even if the house trade in and the builder financing checks out, you still need to be comfortable with the builder's ability to build you the house you want with the level of quality you desire. To be honest it would surprise me if a large builder that offers these services and is building subdivisions would also build a single custom home on acreage or lot that you found. Perhaps I am overstepping here and should just stick to the original question but I'm reading between the lines a little bit... I feel a little concerned for you because it seems as if the convenience of having a builder buy your home and provide financing might be so attractive that you would jump on that opportunity without shopping around or really examining your options or the builder in question. Perhaps that would work out ok for you if you 'lucked' into the right builder and if the security and convenience of having some of the steps handled for you and not having to move twice is worth the higher cost you will pay. But then again you might choose the wrong builder for the wrong reasons. While the sale of your current home and financing your new construction are definately key to the success of the entire project, remember that the most important qualification of a builder is that they can provide you with a well built home. Perhaps you should get together with a good lender and learn about different ways you can make this work beyond the ones you have thought of so far. I hope that helps, and if I've misread the situation I'm sorry. :) Good Luck!

I would work on improving your credit scores. There are many forums on the internet where they talk about things you can do to build your scores back up. You can also learn how to remove stuff from your credit report that should not be on there. We used to recommend a credit monitoring service I think was called Credit Karma. There was a lot of information on their site about maintaining a good credit score. There are one-close construction loans out there, where you close once instead of twice. But I believe you would need better credit for those. Don't try to rush into something and think you can fix it all later. You don't want to get yourself into a situation where you are paying outrageous rates for your home. It wont be worth it in the long run. Good luck to you!

A bank shouldn't pressure you into accepting a charge just because they write the loan, and that is especially true if they hold both loans. That is a massive violation of agency, and while that may have happened on a regular basis before the CFPB, it shouldn't be happening now and it puts the bank in a pretty compromised situation. What you are describing is tantamount to fraud. I do know of one time when a bank offered an incredible financing package to someone on a multi-million dollar home because they held the loan on the development and they were concerned about recovery. When things went south the bank ended up eating the loan, the attorney fees, and had to refund the owner all monies. The client that I spoke with lived in the house for two years while this was going on and was awarded every mortgage, tax and insurance payment he made, because of that conflict of interest. Next, this is a regional question. I don't know where the OP is and so things change but in my area, one bank does about 80% of all custom building loans and they have incredible sway over builders. With just a few phone calls completely derailed projects magically get back on track, now if you are building in an area that is much more urban that might not be the case. Whether or not a bank is going to go to bat for you over a dispute about a change order depends on the bank... But then again that is not the protection that I was speaking of. I am sure that you all considered the various statutes available to home buyers and builders in all the states. For example, in my state a bank may not issue a judgment for collection greater than the original appraisal of the home. Other states have a one-action rule, in which a bank may pursue either a judgment against you or foreclose on the property but not both. Still other states have non-recourse laws in which loans secured by a home are limited to only foreclosure and no judgment may be sought for shortages. In many states this will work for construction loans and in others they may not. The protection offered by banks and mortgages is the one against a catastrophic problem. Your house encounters a problem such that it only makes sense to walk away from it. Or your builder absconds with most of your funds, and doesn't pay any subs, etc. While these events are rare, they are not unheard of and every populated area has its fair share of these events.