Any DUers Familiar with Home Construction Loans?

[BayCityProgressive]

My partner and I are currently house shopping. For a while we looked at older homes but we recently found out that new homes are being built in a new subdivision and being sold for around $139,000 lot included. This was only about 10,000 more than we were looking to spend and brand new. We are looking into a home construction loan to purchase a lot and have a home built. Has anyone here done this recently? We make about $76,000 per yr combined income. He has perfect credit. My credit has two items on it that do not belong to me that I am currently fighting. I also had a high debt to income ratio (credit card debt should be around 10% and mine was about 20% before I earned a raise) now that ratio is right around 10% and dropping. Are we going to have to pay out the ass up front and have other DUers ahd to go through a ton of red tape?

[benburch]

1. Do you really want to get in that deep?

That is almost twice your annual income!

[JuniperLea]

4. Surely you jest...

I'm in Los Angeles and my income alone is nearly that... and I have a $300,000 mortgage on a townhouse that is currently valued at $450,000... and I'm set better than most around here.

Anyone who can find a home at that price and can afford it should grab it.

[benburch]

9. I bought a 48,500 home when my income was $44,000.

And have never regretted it. I cannot imagine how I would have gotten along had my payment been three times what it is now.

[JuniperLea]

10. How long ago was that and where do you live...

The area means more than anything. When I made 44k, I bought a house that was $89k... that's how it is in LA.

[benburch]

12. 1983, and Chicago.

I pay $400.38 every month.

[JuniperLea]

15. Well, that explains it

The house I bought for $89k in 1985 is now worth $450k... and the one I bought for $214k in 1995 is now worth $650k... Your house is now probably worth somewhere near $300k or more and a mortgage payment would loom near $1700 a month.

Times have changes, my friend. The good news is, you are sitting on a nice little nest egg!

You know what I can get for $400 a month in Los Angeles? A slum apartment... studio, four floor walk up. And that is if I qualify for a rent subsidy. I kid you not.

A one bedroom condo in a very nice neighborhood can run you anywhere from $600k to a million plus. In a shit poor neighborhood, you would be lucky to find the same condo for $300.

Mine is no Taj Mahal... 1167 square feet, three bed, two bath... crappy part of town... they are selling in my complex for $440 - $450k. I bought mine two years ago for $300k... my mortgage, plus homeowners association and taxes (paid through an escrow account) is $1880 a month. That's half my gross income and that's the best I can do. The old rule of 25% of your income just doesn't fly anymore, unless you want to rent a box under a bridge.

[bleedingheart]

17. The old rule of thumb was that you can generally afford a home

that is 2.5 times your income...

However now it is calculated as a percentage of your income that you can afford to pay in mortgage and tax payments...but I am not sure of what it is...


My husband and I did not follow the rule... when we bought our home it was about 1.2 times our income..

[bleedingheart]

18. Remember to consider Tax Payments...

it may seem affordable and a good idea...but make sure that the mortgage and tax payments combined aren't too much of a stretch...

[benburch]

19. I set 1.5 as my limit.

And I have always been glad that I did.

[bleedingheart]

21. I am also glad..

I find that putting too much money into your home may be fine for some, but I like being able to eat and have fun and also save for a rainy day...

[JuniperLea]

2. Do you have a down payment nest egg?

or will you be financing the full amount? Your combined income is plenty for that price on the new home! You might save yourself a lot of headaches by going for the new place and not have to deal with construction... it's brutal!

Even with the debt ratio, you should be fine... you may have to get a slightly higher interest rate, but it would be worth it in the long run.

If you have money to put down, you may be able to get a home equity line of credit... put all those debts on that 2nd and reap the benefits of claiming the interest on income taxes... while we can still do that anyway.

Good luck! Hope you and your partner are very happy in your new home:)

[unblock]

3. check with the builder, you might only need a deposit

the usual arrangement only involves a deposit up front and maybe a further deposit at a later stage of construction.

this is one of the many reasons why people get new construction through developers in subdivisions instead of buying their own lot and designing their dream house.

[madrchsod]

5. one thing i can tell you is...

try and find a savings and loan that is local and doesn`t have to many branches. we got a regular loan from a savings and loan that only loaned money with in 20 miles of it`s two offices. we got it 5.2% with a 5 yr refinance but nothing over 7% for 25 years. they also do not sell the mortgage which is very important. an older home is alot of fun fixing up but most of the time a new home has a better resale.
that`s the two most important things i can think of--
a well established community saving and loan and a guaranteed no sale of mortgage

[DancingBear]

6. If I was a bank officer, I'd take you to dinner!!

A 2:1 income/housing cost ratio is a banker's dream. You shouldn't have any trouble at all, but if ANYONE gives you any problems shop the loan around!

Just one thing - what is the new home market like in your area? In this flat housing market, there is NO WAY I would buy in a sub-division that is not (almost) fully built out, unless you plan to stay there forever. Your equity will vanish with each new house they build, since anyone who is looking to buy will think the same thoughts (new!) that you are. Hence, if you do need to sell you are really up against it.

P.S. PM me with specific questions if you'd like - we've been down this road many times. :)

[BayCityProgressive]

8. thanks for all of the advice everyone

We don't have a whole lot saved up. The contractor said we need a $500 payment for the reservation of the lot which I have. He will also need $3,500.00 towards the home to begin construction which we could easily come up with. We do plan on staying wherever we move for a long time, which is why we really are considering going with something new that we don't have to spend time fixing up! We have completely remodeled the house we are in now...we don't want that again! Especially since we work and go to college full time!

[nosmokes]

7. take a c ourse on home buying at your local community college

learn everything you can about the area you're interested in and ty7pes of loans available. get involved with the local planning committee orthe HOA or who ever is responsible for making recommendations to the city or county or whatever gov't jurisdiction it comes under. that way you can find out if that new subdivision is gonna be sandwhiched between a f'way and a mega mall in 5 years or if there is a plan for open space and you can get a feel for who's involved in the neighborhood. this is especially critical if you're looking at moving into an older neighborhood and rehabbing a house. good luck!

[agates]

11. Do you belong to a Credit Union

or are you eligible to join one? They can be much more accommodating and flexible on construction loans, mortgages, etc.

Not sure about where you are, but our credit union used the higher of the two credit scores on a joint application to determine the interest rate on a loan. Nice.

[leftupnorth]

13. It's kind of a buyer's market right now

in Michigan. Economy sucks, people are leaving. Don't be in a hurry if you don't have to.

As far as a construction loan, i have done something similar recently. We put on a $40,000 addition. We had a construction loan written and the payments were $500/ month for 12 months. We had to swing that payment along with our original mortgage payment. It was easy, though, because I paid myself for most of the work we did, which covered all the payments.

After the construction was done, we refinanced the whole thing (original mortgage and construction loan) to one new mortgage. My credit wasn't that great but I didn't have to pay much up front, like $2000 for fees, etc. But we now have a 130-140,000 home that we owe less than 110,000 on.

We saved money by doing a lot of the work ourselves. Framing, wiring, painting, flooring, siding. If you can do a lot of the work yourself and line up contractors early in the off season, you can save money, but you won't make any of that back until you've sold the place. That's not for everybody, though, and a brand new one built for you for ten thou over what you want to spend is a pretty good deal as long as the quality is there.

A few guidelines I have learned in our real estate adventures.

1. The perfect property comes along once a month
2. Never spend 1/4 of your take home pay on a mortgage NO longer than 15 years
3. If you want to make money, or get a bargain, work hard and pick the ugliest house on the block and make it beautiful.
4. A gabby realtor is a good one.
5. You WILL pay for a home inspection before you buy, especially if it is a used home, unless you're stupid. ;-)
6. Hire your own appraiser, if you can. Just make sure your appraiser is on the bank's approved list.
7. PMI is "Private mortgage insurance" and you should demand to know what you get for purchasing that insurance, and who is allowed to file a claim. That's if you want to make your banker uncomfortable. But really, it's insurace that YOU buy to insure THEM against you defaulting on the loan. It's BS, but they get away with it.
8. Not all banks will give you money, shop around.

Good luck! Have fun!

[Kingshakabobo]

16. I agree with most of what you said......

....except #6 and 7.

I find appraisers are pretty much useless when it comes to determining value for prospective buyers. Most appraisers only validate purchase prices based on square footage and number of bedrooms/bathrooms. They can be way off when it comes to floor-plan desirability, condition and upgrades. If you look at an purchase appraisal, you will see that most weight is given to the "contract price" of the subject property. In other words, they assume you(and other buyers) shopped around in a fluid market. I think a buyer is better off taking the bull by the horns, making their realtor pull comps., and investigating those comps for condition, floor plan, desirability etc. Like any other transaction, no one will watch out for YOUR money better than you.

Re PMI: While it should be avoided like the plague if at all possible(by using a second mortgage or 20% down-payment) it's not complete BS. Yes, it only insures the lender but it has allowed millions of people the ability to purchase homes without the required 20% down payment. Probably 9 out of 10 clients I deal with are able to avoid PMI by utilizing subordinate financing but there are still a few people that have to use PMI due to factors that preclude them from securing a second mortgage(lower scores, adverse credit, irregular income etc.). Also, PMI has become "a little" more attractive due to the rise in short-term second-mortgage rates. I've had a few clients with close to 20% down payment say screw it and take the PMI(the better your equity the cheaper the PMI) rather than deal with the hassle two loans.

People with higher loan to values that have to take PMI should look at FHA loans or something called "my community loans" since the PMI premium can be half the premium for other conventional loans.....especially for people with lower scores.

[leftupnorth]

20. Appraisers hired by the bank

are useless. If you're paying the appraiser yourself, you can have a candid conversation about what you expect out of the house and lay out good reasons why you think it is worth more than the standard $/sq ft price. When you hire them directly, you get comps, at least you should. One definitely should have a realtor do an additional "market analysis".

My mom is a realtor and my stepdad is an appraiser. They do their best to work with the homeowner/buyer to get the price they need to hit. Unfortunately, sometimes the market gets artificially inflated by over optimistic appraisers and crooked bankers. That happened here, the good ol' boys network at it's finest.

PMI is still BS. The bank should buy their own insurance against someone defaulting on the loan, it's called the cost of doing business. They make enough money on the loan as it is, in fees and interest. Charging someone more money to make sure they don't fail to pay you more money is worse than a credit card company jacking your interest rate after you missed a $15 vacuum payment at Sears, or when your debt to income ratio moves out of their magical secret number. When you get charged for PMI, they haven't even given you a chance to miss a payment on the loan and they're already charging you more. It's a racket, I don't care how many people it's "helped".

Sorry if I'm being hard headed about it, but my bank has been jacking me around about PMI. They told me it would AUTOMATICALLY come off after x amount of months. Well, it didn't, they said i had to ask for it to be removed, like it was something that I should be happy to pay. Forgive me, but I just don't understand this sense of entitlement some bankers think they have to MY money.

[Kingshakabobo]

22. I think you are making my point re: appraisers.

"They do their best to work with the homeowner/buyer to get the price they need to hit."

That's my point. They START with a number....the purchase price or the homeowners estimated value in a refinance transaction...and they "work" toward that number. Also, the appraiser you hire on your own is also doing appraisals for banks so it's not like you are getting any different level of service. Don't get me wrong, I'm not saying an appraiser can't judge a value - I just think your mom is more in tune with the market than your stepdad since she is in and out of the "inventory" on a daily basis and listens to buyer feedback. Don't trust realtors too much, except for mom, since they are mainly looking for a commission.

Re: PMI

You need to have a better understanding of how the secondary home-loan market works. Most of that interest you pay goes to the investor on Wall Street who purchased mortgage backed Fannie Mae/Freddie Mac securities - not the servicer you deal with on a daily/monthly basis. Your servicer collects a relatively tiny amount of every payment you make - that's why the big servicers gobble up all the loans. It's called economies of scale.

The only reason the Wall Street investor is loaning money to you at low rates for loan-to-values over 80% is BECAUSE he is insured. The secondary home loan market is very efficient and you are borrowing money for rates that are not much higher than government backed(bonds) securities. In other words, for not much less interest, the investor can loan his money to the federal government(instead of you) and have almost ZERO chance of default. Bigshots like Alan Greenspan have bitched for years that you and I aren't paying enough premium over treasury rates - if they had their way we would be paying HIGHER rates based on supposed higher risk.

Now, you CAN borrow over 80% without PMI but that money will come from "non-agency", mostly, sub-prime/portfolio lenders. They'll be happy to loan you money without PMI and incorporate their "cost of doing business" in their rates at about 9% versus 6.5% for a Fannie Mae/Agency loan. Even the prime portfolio lenders(jumbo loans, interest only loans etc.) mirror Fannie's underwriting and PMI guidelines(they even accept a Fannie automated approval instead of underwriting the loans themselves)because it's so efficient and losses are kept low.

I agree PMI is hard to shake because the servicer has no vested interest in letting you off the hook. That's why it it easier to refinance and have one of those so called "crooked appraisers" give you a value so your loan to value is less than 80%. If there is any "good old boys" inflating vales, and there is, 99% of them are doing so at the request of loan officers to avoid having to charge their buyers higher rates and PMI. Mostly, it's the bank/investor getting screwed by inflated values not the consumer.......predetory lenders and cash-out refinances are another story though.

[Kingshakabobo]

14. Check with ABN Amro for a construction loan...........

They have some pretty good construction-loan products. I'm a loan officer/mortgage banker in Chicago. I don't do construction loans but my colleagues that do usually start at ABN AMro - I believe they have branches in Michigan......In Chicago, they are called Lasalle/ABN Amro.........their wholesale division we deal with is called Interfirst Mortgage company. As someone pointed out earlier, the builder is a good place to start as they will have access to those niche lenders that may specialize in lower down-payment deals. At the very least, you should shop on your own to keep the builder's people honest.