1 + 1 + 1 does not equal 3 in these cases.

This particular bank does not believe the exta lot brings dollar for dollar value to the whole.

Are you building on just one of the lots or are you merging them and placing the house in the middle of the two lots? If you merged them, you probably lost some value on the second lot, as it had more value as a build-able lot than as a side yard,

I suggest you also cross post and ask in the Buying and Selling a Home forum where the RE agents hang out. They maybe better be able to help you.

I'd start looking for a different lender. Construction loans tend to vary quite a bit from bank to bank as to how much of the land/lot they will consider as equity/down payment towards the typical 20%. It sounds like one of a few things happened. Whoever told you to pay cash for the second lot was wrong and didn't understand the limits of applying the land value as the down payment, AND/OR someone messed up the paper work and didn't include the value of the second lot on the application. Quick math $55,000 + $85,000= $140,000 which would be a typical down payment amount for your loan amount. Another appraisal won't matter as I doubt it would make enough of a difference to lower the amount significantly.

rrah

Thanks for the explanation and advice, of course had we known we would have financed the second lot.

Flo Mangan

Thanks for the advice, yeah for both errors we did both at the direction and discretion of our lender - which has been kind of a nightmare so far.

We went with this bank because it was a one-time construction loan and we were worried about rates really rising over the next year.

Keep asking for closing date, how much we need to bring, etc. and it seems like every time she comes back with several things she forgot to ask or include (two years of tax returns - then three, then two months of bank statements - then another two, then corporate returns, then, etc. etc. etc.)

Then said for the loan to go through we needed a perc test, found out we were hooking up to county and said we needed a perc test for.... foundation (while our builder and architect stared back with unbelievable eyes).

What did they appraise the finished house at? Sounds like they are appraising it for less than they originally thought.

cpartist

Initially we went in at $600k but wanted to have some buffer and upped it to $700k, appraised came in at $641k

Flo Mangan

Yeah, strange how appraisal works - I looked at the appraisal and they have both lots at $70k (when we paid $112k for the two).

The lot directly across the street went for $69k and sold within a week of ours (same size, type, etc.) and the other lots listed in the subdivision are $75k, $85k, $72k, etc (for one lot same size and similar types). Even the lowest listed currently in our neighborhood is at $48k.

ditto on talking to other lenders. Some banks actually offer 'no' down payment these days. Obviously on how much you make.

robin0919

Thanks, I may do that - we would just prefer not to have a ton of money tied up from the get-go. :-)

It probably doesn't matter how you paid (finance or cash) for the other lot.

Up thread it was mentioned that the value got lowered by combining lots - and that is the key point here. You paid $112 and it is getting appraised for $70. That is your primary issue. Not sure bank choice will matter.

I know personally, I value a large lot more than the average person. But they don't appraise much more.

In my area, I would expect a 20% increase in value for a doubling of size. So $55k to $70k is about right. I have had land portion of the appraisal come in significantly below what I purchased the lot for.

@David Cary is correct. Combining the two lots ($55k and $57k) does not mean you now have $112k worth of land. As each lot was empty and had potential that it could be built on with a separate home, they were worth more. Now they can only be sold as one, and so lose some of that potential. Even once you build on it, you can sometimes see a bit of a hit to the land value for a while, as your lot with your house has less value for someone who wants to build their house on a lot. Overtime “typically” land value goes up so it is only temporary but there you go.

It does sound like your lender did drop the ball in explaining these risks though. Financing other lot might have gave you more cash flow, but they may still have required higher downpayment as you still might have run into issue of appraisal falling below actual cost to build (and had issue with higher DTI which could have been issue for you).

First, don't get the lots reappraised, they don't ever figure into the equation. Nor would financing the second lot instead of paying cash have helped at all. Banks are notoriously bad at communicating construction loan processes to customers, as a result there are a lot of people who misunderstand the way construction loans work, even some who have had them.

Before you build a house you have a lot with an appraised value, once you start building a house, your lot and home get combined into one appraisal. So once you start construction, or submit plans for construction, they stop caring about the separable land value and start looking at the value of the entire constructed house.

In the end, it is a simple formula. The loan amount is based on the appraised value of the home, not the cost to construct, and not what you paid for the land or anything else.

E.g. You pay $100,000 for a lot. You want to construct a house for $400,000. Now suppose the appraised value of the finished home based on the plans is $380,000. A bank will base the loan percentage on the value of the house and supposing the bank will loan up to 80% of the plan's appraisal they will loan $304,000. If the appraisal comes back at $480,000 on the exact same house the bank will pay $384,000.

As for the land appraisal, appraisals break the value up between the land and the house, but largely they don't matter. In the end, how you slice the pie (split between land and constructed house) doesn't change the overall size of the pie (the appraised value of the house).

Additionally, many banks will set a hard cap on construction costs. My bank will loan 90% of the plan's appraised value up to 100% of the construction costs.

Good luck

Construction loans are also funny - they won't like to finance more than 70% loan to value because so often "real" custom homes may have challenges with marketability as they tend to be more highly personalized, thus increasing the bank's risk.

cpartist

Thanks for the explanation, our lender sucks at conveying anything to us or making anything clear.

Jeremia, I seem to remember you being in my area.. If so, every local bank we talked to while researching construction loans would only loan 75% of appraised value on Jumbo loans (anything over $424k). Some were even 70%. You may want to verify what their requirement is.

We chose to go a riskier route and get our construction loan through a local bank, then the final mortgage through Wells Fargo, as most local banks don't offer Jumbo products. Luckily, we got a great rate on a 30 year fixed - but it was very stressful and we had well over $250k cash into our build by that time.

Financing, building, appraising, construction loans / permanent loans, locking rates, LTV - ALL STRESSFUL and made exceedingly complex by banks that often have hard time communicating exactly what they want. GOD FORBID if you do anything "different"

Glad you worked it out. Not sure I would have continued given how much your initial figures were, e.g. 700 - 641 = 59K under appraisal construction AND losing the value due to combining lots.

I still recommend finding a good mortgage broker because you will need a good Title Company too so you have a good closing even with a one time construction loan closing. Title Companies can make or break your deal. Mortgage Brokers can be of immense assistance in "advocating", explaining and finding best overall deal for you.

Flo the one time my ex and I went with a mortgage broker, we walked out because a lot of extras were added at the closing. No thanks.

@Jeremia Froyland appraiser shows up at our house tomorrow (we are sellers). Had a good contract so hope he doesn't blow it up. We'd like to be able to close in 2 week!

It’s not the appraised value of each individual piece. It’s the appraised value of the project as a whole. It does not matter at all what the lot costs, or the constructions costs are. Costs are irrelevant to how much the bank could sell the house for if you defaulted. That is all anyone giving you a loan cares about: the value of the collateral.

If you want to build a 1M house on a lot that you paid 1M for, but the surrounding area is trailer park central, and the lender thinks the whole project would sell for 500K, if you were lucky, then you are gonna need to bring 1.6M to the table to make it happen.

Buying two lots only makes the end value worse. Larger lots do not appraise gor very much more over smaller lots.