Difference between a construction loan and a mortgage?
Some clients who’ve never built a home before think the process of getting a construction loan is the same as getting a mortgage. While the application and appraisal are similar, the loans are very different. Construction loans are short term, usually 1 year, and some as short as 6 months, with a balloon payment at the end. This loan is generally extendable if you need more time to finish the construction on your home. When you finish construction, the loan is paid off by your new mortgage. The interest rate on the construction loan is generally a little higher than a mortgage. Don’t get freaked out by that. The construction loan works much like a credit card. You may be approved for a $500k loan, but the bank does not just drop that in your lap at the start. Instead, the bank will release funds as the construction progresses. And, really important, the bank rarely releases funds in advance. Instead, the bank reimburses you as the builder once a phase is significantly finished. You only pay interest on what you have drawn. For most clients, the first draw is when the foundation is complete. This is why you need a capital fund account to get the construction started. As that account is depleted, the bank will reimburse you for construction coasts. As a general rule, the only time the bank will advance monies is when you are ordering materials that are manufactured specifically for your home, and cannot be sold to someone else. Examples are windows, doors, cabinets and counters. Most banks will require interest only monthly payments on the construction loan. If you do not complete construction in the loan time period, banks will generally extend the loan, but you may face an additional one-time payment for that extension.
While mortgages are almost always available at large banks, construction loans rarely are. As construction loans are viewed as high risk, most construction loans are only available at smaller banks. On top of that, owner builder construction loans are not available at most banks. Owner builder construction loans are generally available only from smaller banks who have had good experience with a builder. Ethical owner builder consulting companies guard their relationships with banks carefully, and work to verify that the owner builder can succeed in building his own home. BGCH has done the shopping for you, and knows where to get the money. So instead of wasting your time, and piling up frustration, contact us for guidance on how to get your construction loan.
What does it take to qualify for a construction loan?
You probably have good income and good credit, but you still need to borrow funds to build that new home. Maybe you have enough money to buy the land, but not enough to build your new custom home. Maybe you’re wondering if you really could build your own custom home. In today’s market, bankers are looking for several things in a client file for approving a construction loan. Provable income, good credit, Cash in hand, DEBT-TO-INCOME ratio, good appraisal, and decent budget. All of these have to fit. Any one of these that is outside the box can create difficulties in qualifying for a custom home construction loan.
So if you’re thinking about building your own new custom home, contact us so you can be put in touch with a Texas lender who can verify that your credit qualifies for an owner builder construction loan.
How much cash will I need to qualify for an owner builder construction loan?
In today’s market, bankers are looking for several things in a client file for a construction loan. Provable income, good credit, Cash, DEBT-TO-INCOME ratio, good appraisal, and decent building budget. All of these have to fit. Any one of these that is outside the box can create problems in qualify for a loan for building your own home.
Liquidity means that you have available cash in the event that something does not go according to plan during construction. How much? It varies from bank to bank, but one broker told me lenders are looking for a minimum of 7% of the loan amount, preferably closer to 10%. So does it have to be cash in the bank? Not necessarily. There are a number of creative ways this can be done. 401k, home equity loan, occasionally even a credit card advance.
Conserve cash. A family who lived in San Antonio sold their home, and netted 70K cash. They purchased 10 acres East of San Antonio, their dream property, and financed the purchase with a 20% down payment. They spent the rest of the $70,000 on electricity, well, driveway and down payment on a recreational vehicle to live in on the property, leaving them with no cash or savings. That’s when they called us. We were not able to get them a construction loan. How should you handle this situation? Call us when you find land. Most development expenses such as utilities and driveway can be added to the construction loan. If that family had called us before they spent their cash, today they could be enjoying their new custom owner built home, instead of merely existing in a cramped RV.
Another client who wanted to build near Bryan/College Station found an unbelievable deal on Wolf appliances. He had 30k to his name. Without consulting us, he bought his appliances for $8900 before he was approved for his construction loan. Because his available funds were now below the bank threshold, he was denied the loan, and could not qualify as an owner builder. The bank gives you no credit for any materials or supplies you have bought for the new home. That appliance savings cost him a lot of money in savings he could have achieved as an owner builder.
Another would be owner builder had been collecting materials for years for his new home. He had all his windows, all his appliances, in fact he had 4 storage units full of materials for this new home. But he had no cash. He had to save up for a couple of years so he had the cash to qualify for the construction loan.
So don’t buy a boat, don’t buy a new car. Hang on to cash. It could make the difference when qualifying for an owner builder home construction loan. If cash is tight, get in touch with us. We have one lender in Central and South Texas that not only offers owner builder construction loans with low down payment, but they offer a “direct pay” program, meaning you don’t have to float the construction costs and get reimbursed by the bank. Instead, you submit invoices to the lender and they will pay the invoices directly to vendors and contractors. That way, you can operate as an owner builder with less cash reserve and build a lot more equity into your new home. The good news is that an overwhelming majority of our prospective clients qualify for loans for building their new home. It is extremely rare that we are not able to accomplish this task.
Should I pay off the land purchase loan?
A common idea exists among some who want to build a new home that you must pay off the acquisition loan on the property before you can qualify for a construction loan. It’s a total myth. In fact, sometimes paying off your land loan can be a tragic mistake. Why? Because bankers don’t think like most people. In today’s market, bankers are looking for several things in a client file for a construction loan. Provable income, good credit, Cash in hand, DEBT-TO-INCOME ratio, good appraisal, and decent budget. All of these have to fit. Any one of these that is outside the box can create major difficulties in qualifying for a custom home construction loan.
So should I pay off the land purchase loan? While it may shock you, the answer is: Probably not. If paying off the purchase loan means you have little funds left in the bank, don’t dare pay off the construction loan. Remember, bankers think differently than non-bankers. Bankers are in the business of selling money, and they want to loan you as much as they can. So, believe it or not, they would much prefer that you owe 75k on your land, and have 75k in the bank, than that you have paid for land, and zero in the bank. You can get a construction loan in the first situation, but not in the second.
Check with our construction lender first. If you can pay off your property, and still have 50-100k in the bank, then OK. Better yet, call us, and we will put you in touch with a Texas lender who can answer your questions. The best? It doesn’t cost you one penny to find out how to best qualify for your new owner builder construction loan.
What credit score do I need to qualify for an owner builder construction loan?
Credit and owner builder construction loans is a moving target. It depends on the bank or lending institution. I’m making this video in 2019. To qualify for a construction loan, most lenders are looking for a minimum credit score of 680 and above. In addition, no recent foreclosures or bankruptcies, and no late mortgage payments in last 12 months.
So what can you do if this is a problem? Sometimes you can do credit repair. If you are willing to spend some time on research, you may be able to repair your own credit. Be aware that there are a few companies who really work to repair your credit, while many others are scams. Be careful.
You will generally need at least 4 good lines of credit. That could be a car loan, a mortgage, credit cards, and any number of other types of loans. Sorry, Dave Ramsey fans. Bankers despise Dave, and you need a banker for an owner builder construction loan. The golden rule applies here. You’re familiar with the golden rule? In lending, the golden rule is: He who has the gold makes the rules. You are asking a lender to put hundreds of thousands of dollars on the line for your owner builder construction project, and lenders ask you to prove that you have handled credit dependably in the past. So what should you do? Contact us so you can be put in touch with a Texas lender who can verify that your credit qualifies for an owner builder construction loan. We can even show you how to quickly build credit if you lack enough lines of credit. So contact us today for more info.