Advice with a new construction loan (1 Viewer)

[gianmarco]

We're looking at building a new home. For what we're looking at, we'll be acquiring a house, then tearing down to build. This isn't something we've done before and I'd be curious if anyone with experience here can chime in and offer any advice.

1) Get a construction loan or let the builder buy the property from us, build the house, then just buy and finance at that time? Pros and cons?

2) What kind of rates are standard for these?

3) Things to look out for in these kinds of loans?

4) Go with a bigger national bank or a local lender?

TIA and will answer yours if you post your rooster.

 

[schlesinj]

Let me start by saying that things have changed since I went through the building process. I built my house in 2009, but secured the construction loan before the market crash and moved in after.

First, I purchased the land using cash/HELOC equity. I went through Sovereign Bank (now Sanander). I am sure the process is different now as banks look at real estate differently. At the time, the loan was variable based on Prime minus 25 BPS. Due to market conditions, I am sure loans these days are Prime plus ____ BPS. The bank essentially used the plans of the new house, comps and an internal appraiser to determine the expected value of the house post construction and that is how they determined how much to lend. I am sure it was based off some % of expected value and I bet that ratio is now worse for the borrowers to provide lower risk to the bank. Next, following completion of construction we had to convert to a fixed rate mortgage. An appraisal was completed and the loan was fixed. For me, since this was post crash the "value" of the house was lower than expected and they were not willing to convert. After a number of months remaining variable (which by the way was a lower rate than the 30 year fixed), I utilized a clause in the documents that allowed for a modification on the loan (which essentially swapped me to a 30 year fixed rate loan starting from the day we created the construction loan.

One important comment: Your budget will always be more than what you expect. You will always find an upgrade, so in those cases the change orders will come out of your pocket.

 

[jon_mx]

It might be hard to find a builder willing to buy your property and finance the building and then sell it back. That is a lot of risk for a builder for a customized home and there are more expenses in transfering it back and forth in title work and insurance. You will probably have to finance it in your name. The biggest thing to watch out for is that the builder pays his subs. It is best to get some sort of lien waiver release from all the major subcontractors who did work on your property. Otherwise you could end up paying twice for the work.

 

[jon_mx]

And budget for your upgrades. 9 times out of 10 an upgrade will add more to your cost but will not improve the value of your home outside of personal enjoyment. For example, appraiser will not give you any more value on a $2500 light fixture than he would $150 light fixture. Up front, make a budget for your upgrades and stick to it. A couple thousand here and couple thousand there adds up to $50K or more before you know it.