Home Financing Options: Part 2

So you’ve found the perfect property, and are excited about getting started. But you have limited funds, and need a loan to acquire the property. Should you head to the bank for a loan? I suggest that before fore you find that perfect property, contact us to get with a great lender and get prequalified. There are 2 ways to handle the acquisition loan. One way is called a bridge loan. You want to build soon, but don’t have everything together yet, so you need a short term loan to buy the land. We call that a “bridge” loan. It bridges the short term so you can properly prepare for construction. That will certainly get the job done, but it may involve extra closing costs. A second option that may save you money is to negotiate with your seller for a delayed closing. At this point, we will probably need 3 months to prepare for construction. During the 90 day period, you can either buy plans off the internet, or get a designer to draw custom plans, then get quality cost estimates or bids, and get the package to the lender for approval. Current lender approval is taking at least 1 month in central Texas, so you only have 2 months to get the entire package to the lender. While it may be hard to imagine that it could take that much time to prep for construction, it really does. It can be done in a shorter time, as a few clients have proven. But you really have to “have your ducks in a row. “ In another video, we describe what generally must be done to prepare for construction.

I love my clients and my consultants. One of the more difficult parts of owner building can be getting a construction loan. This can be a real stumper for clients, as they’ve never had a challenge getting a mortgage. But getting a construction loan is not the same as getting a mortgage. It’s especially true for an owner builder construction loan. Why? The bank is looking at you as the builder. Builders are expected to meet higher levels of financial security than someone who is just buying a home. Bankers don’t think like the rest of us. “Common sense” financial concepts, such as those taught by Dave Ramsey, may very well go contrary to banker thinking. You see, banks are more interested in the return of their money than the return on their money. That is why you have the golden rule of banking: He who has the gold makes the rules. To be fair to bankers, many of these rules are imposed by regulators. While there are many regulatory standards, each bank in Texas can make their own rules for construction loans. One of those rules is provable income. Lenders are looking for steady provable income, and they will verify that income. What does that mean in real life? Well, first. It’s not 2005. Stated income loans for building a new home in Texas do not exist currently. You need regular provable income. If you and your spouse have good jobs with a paycheck, that is best. It is often easier to qualify for the loan on your new home while you have a job, than after you have retired, no matter how much money you have in the bank. There are 2 situations where regular provable income can be a problem. You may be retired, with low living expenses, and a huge 401k. If you are not taking sufficient regular distributions from the 401k, lenders may frown. You can get a loan without taking regular distributions, but interest rates are higher in this situation. Secondly, if you are self-employed, it is common to write off much of your income, and show low income to minimize taxes. Lenders will ask for the last 2 years tax returns, and those returns need to show enough income to qualify for the loan. This is a double edged sword, and I know of no way around it. Contact us to find if you qualify for a loan for that new owner built dream home. We will put you in touch with a Texas lender that can give you answers.

Many future clients operate under the misconception that all credit card debt should be eliminated before applying for an owner builder construction loan. So should you? Not necessarily. Every loan is different. Each construction lender will have different standards for loan qualification. So before you pay off those credit cards, check with the lender. I have even had a client or two who had paid off all their credit cards, and had little remaining cash. Because they had good credit and a low debt-to-income ratio, they were able to get credit card advances to build up their cash in the bank and, after about 3 months, they qualified for the construction loan. Before you make a move that you think will improve your ability to qualify for a loan for an owner builder construction project, contact us. We can put you in touch with a Texas lender that can keep you from making a mistake that could kill your dream of building your own new Texas home.

Figuring out the cost of building a new home is one of the most daunting tasks that most owner builders face. If you want to build your own new custom home in Texas, we can help with cost estimates. Many factors go into determining the cost of construction. The land you want to build on may have a large slope, which can increase the foundation cost. The dirt may be highly expansive, and require a more costly foundation. The location of your new home can certainly affect costs. It generally is somewhat less expensive to build close to a major city, just outside of the city limits. But building far out in the country can drive up costs as well. Utilities can severely affect costs. A well could cost $14k or $40k depending on depth. Septic systems are generally more expensive than public sewer. Driveway costs can vary greatly, depending on the length and width of the driveway, and the material used to build it. The plan you choose can significantly affect costs. Generally, the more corners a home has, the higher the cost. The finishes you choose also affect costs. Stone is more expensive than Hardie plank. Granite counters are more expensive than laminate. In addition, when we are budgeting a new home, the cost must be for the entire project, and must be the cost of having the work done by contractors, even if you want to do some of the work yourself. So if you are wondering about the cost for your new home, contact us for guidance. There is no charge for an initial consultation.

In today’s market, bankers are looking for several things in a client file for a construction loan. Provable income, good credit, Cash, DTI 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 qualifying for a loan for building your own home.

DTI ratio means the amount of your debt compared to the amount of your gross income. Debt will generally include your current mortgage, car loans, credit card loans, student loans, and any other loan that normally shows up on your credit report. One client experienced major car problems during the time we were helping them prepare for building their new home. They decided that they had to buy a new car. The additional debt that they took on with that new car payment meant that their debt to income ratio exceeded the standards of the construction lender, and they were denied a loan for building the new home. So if you want to build your own new custom home and save lots of money, before you take on additional debt, call us so we can connect you with a Texas banker who approves owner built construction loans.