Why do I want a high appraisal?
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 qualifying for a loan for building your own home.
To qualify for a construction loan to build your own new home, one key component is the appraisal. The appraisal is required by regulations, and must be performed by a third party appraiser. In Texas, that means a licensed real estate appraiser. You want the loan appraisal to be as high as possible. Why? Because one criterion for the bank loan is that the bank will typically loan 85% of the appraised value. An occasional lender will loan 90%, and we have one lender that will loan 95% of appraised value, but at higher interest rates. If there is a land payoff, the bank pays that first, and the remainder of the 85% is available for building your new custom home. If the appraisal is not high enough, then the bank may require you to bring more cash to the table or pledge a CD. So what about the tax appraisal? Won’t this appraisal affect my taxes? Not in Texas. The tax appraiser has to do his own appraisal, and never sees this one.
Can my land serve as down payment for building a new home?
So you’ve owned your land for some time now and are concerned about down payment for building your new home. How much down payment do you need? 20%? One of the secrets of owner builder financing is that you are given credit for the equity that you will have when your new home is finished, if you have owned your land for one year when the home construction is finished. Assuming that you are building in an area where home values are equal to or better than the new custom home you want to build, your new home should appraise well. You rarely will need to put down 20% hard cash to build your new home on your own land. Call us to be connected to a Texas lender who can discuss the specifics of your project and guide you through the process. He can review your portfolio and determine if you have enough cash to move forward toward the dream of your own new custom home on your dream property.
Does my land have to be paid off first?
Yes, and no. First, no. It’s a common myth that you must pay off your land before applying for a loan to build your own new home. That’s a total myth. Bankers want to loan you money, and they require you to have some available cash as a working fund to qualify as an owner builder. So you do not need to pay off your land on your own. And, as explained in another video, paying off your land could be a terrible mistake. So does my land have to be paid for first? Yes. The bank will insist on paying off any existing land loan in order to lend the funds for new home construction. Why? The bank does not want any other lender to have a superior lien. So the first thing the bank does is pay off the existing loan. You merely swap payments from your current lender, to the bank as a part of your construction loan. Confused? Contact us to be put in touch with a Texas lender who can answer your questions about the loan so you can build your own home.
What about a one-time close?
Won’t I be able to save on closing costs by doing a one-time close? Few lenders offer an owner builder a one-time close. I’m recording this in 2019. I know of about 15 lenders in Texas who offer owner builder construction loans.
Undoubtedly there are others. Out of those 15 lenders that I know, only one offers a one-time close, and that lender will not lock mortgage rates until about 60 days before construction is completed.
Why is that? When mortgage lenders lock the rates, they are taking a risk that rates will go up, costing them money. Typically owner builder home construction takes a little more time to complete the home than with an experienced builder. Builders who build the same floor plan over and over can complete homes in 3 months or so, but custom homes generally take longer, and owner built homes can take still longer. As a result, mortgage lenders in Texas rarely will do a one-time close for owner builder home projects. Some of those who do offer a one time close on owner builder construction projects have very stiff penalties if you go beyond the allotted time for the construction period. Call us to be put in contact with a Texas lender who can answer your specific questions about a construction loan so you can build your own new home.
Can I start construction and see how far my cash goes, and then get a loan?
Probably not. There are two major problems in Texas with waiting to get your construction loan. First, you generally need to have cash in the bank to qualify for a loan. If you’ve already spent your funds on beginning construction, those funds are no longer in the bank, and therefore you may not qualify for the loan. The construction lender is much more concerned that you have cash on hand than that you have a paid-for slab. Secondly, title companies and banks are very concerned that, when you start construction before you get the loan, you might neglect to pay one of those early suppliers or contractors, and that vendor or contractor might file a lien, which could be superior to the lender’s lien. So our strong recommendation is, if you need to borrow any money to build your new home, get your financing lined up before you start construction. Contact us to be put in touch with lenders who specialize in owner builder construction financing in Texas.