Maverick Real Estate

Archive for the ‘Construction Loan’ Category

USA Construction Loan

 

The USA construction loan market has become a rather complex place over the course of the past several months.  Indeed, when it comes to construction financing, most experts predict that the challenges that are faction the typical construction lender and contractor or developer alike are certain to continue into at least the immediately future.

 

The most significant issue facing the USA construction loan market today is a serious reduction in the amount of construction financing that is available on the market today.  Therefore, if you are interested in obtaining construction financing, you need to make sure that you have all of your proverbial ducks in a row.  You need to make sure that you have the best possible credit rating and history before you dive into the USA construction loan market. 

 

Equally important, when it comes to construction financing in these difficult economic times, you need to make certain that you can readily demonstrate to a construction lender that your particular project will bring in revenue sufficient to deal with the construction financing that you desire to obtain.  At this point in history you really do need to make certain that you can demonstrate appropriate financial wherewithal in regard to your construction project.

 The USA construction loan market has become a rather complex place over the course of the past several months.  Indeed, when it comes to construction financing, most experts predict that the challenges that are faction the typical construction lender and contractor or developer alike are certain to continue into at least the immediately future.

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Financing Land in California

California Land Loan Overview:

The intent of this article is to get you thinking in the right direction so you know what kind of California land to buy and what you can reasonably expect as you get started in the process of dealing with a land lender in California.

California Land Financing Budget (Example):

Land Purchase Price ?$300,000?Land Purchase Price

Soft Cost of Construction ?$ 40,000?Plans and Permits

Hard Cost of Construction ?$350,000?Construction Costs

Closing Costs ?$ 22,000?Fees, Title, and Escrow.

5% Misc. Reserve ?$ 17,500?5% of Construction Costs

Loan Interest Reserve ?$ 35,000?Interest On Amount Drawn

Total Building Cost ?$764,500?

Appraised Value ?$800,000?Estimated Value of Land with Building Completed

Down Payment ?$191,125?25% of $764,500

Benefits of California Land Lenders

Loan officers dealing with California land should be able to assist you with the following information:

1.?Assessment of the estimated yearly taxes, insurances, and HOA fees.

2.?Approximate interest rate for the loan.

3.?Down payment required.

4.?Interpretation of your personal financial statements, credit scores, and income-to-debt ratios to conclude your eligibility.

Utilities Lead to the Path of Finance

One important thing to consider as you look to buy California land is utilities. When construction developers go into the construction stage to build new homes in Southern California then roads and utilities are built for a large number of homes. When the lender knows that a lot has public road access and utilities nearby they are often more willing to supply financing for the land because there is a foreseeable capacity to build on it which increase the California real estate worth and lowers the risk to the lender. The cost of installing utilities on a lot is not considered part of the hard construction costs for building.

Land Loans from a California Lender’s POV

California land loans are more risky to lenders than residential loans. The reason for this is that normally most people do not live on the land they buy since it’s vacant. As a result it is industry practice to not consider land a primary residence until something is built, and so it follows that vacant land is called investment property even if a person intends to build on it in the near future. Also, vacant land is called commercial property in California, that is property used for an investment purpose, even if the land is zoned residential and there are plans in place to build a primary residence. The importance of this categorization for lenders is that their risk increases on lending for land because a person can walk away from a land loan easier than a loan on a primary residence since the borrower has another place to live hypothetically.

Lenders for land will expect more from a borrow than on a residential home loan. There is a larger down payment expected typically than a California residential house or condo. There is more preparatory work expected also. Lenders may expect the borrower or buyer to bring a variety of items to the lender’s table for a construction loan. Here is a partial list of potential requirements some lender’s stipulate in order to obtain a land loan:

1.?Complete and permissible architectural drawings for what will be built on the land.

2.?Detailed time tables for all aspects of construction.

3.?Finalized realistic budget for the building.

4.?Supervisory chart, including a list of builder contact information for contractors and the architect assigned.

5.?Proof of bonded and insured builders and contractors.

Here is a list of the paperwork required from a borrower to get started on a land loan in California:

•?Last 2 years of your federal income tax statements.

•?Last 2 months of pay stubs for both you and your spouse with contact information.

•?Your property information if you currently own including tax statements, HOA statements, any current mortgage statements, and any other debt statements you currently have.

•?Any additional proof of income streams, including child support, trust fund, investment income, dividends, interest, rental income, social security or government monies.

•?A complete list of your bank accounts and documentation, including all your checking, savings, money markets, and banking information.

Conclusion: Some Negatives and Positives

One draw back is that the courts of law in California have less regulations to protect the interests of land buyers than they provide to California residential home buyers since a land purchase is considered an investment. On the positive side, land is like having a clean slate of property. California land buyers have a much easier time when it comes to planning what they want to build, as long as the building plans live up to the regulations and zoning requirements of the city for the land’s location. As a land buyer CA you also have much more flexibility on getting what you want than doing a residential home remodel for example. The best part of all about obtaining a loan to buy land in California is that it forces you to think through the land buying process ahead of time, talk to the right people which you will need to help you build a new home in Southern California and make a financial budget with sensible deadlines so that ultimately you can become a true player in the future development of a community for all to see. Plus you will have a really cool story about your personal experience in the timeless process of building on California land.

Imagine applying for a mortgage for your dream home. You have good savings, a good job, very little monthly debt, and a decent credit score. Your loan approval should be a slam dunk, right? Now imagine how frustrated you are when the bank says your loan application was denied due to your credit report – despite having a good credit score!

Everyone knows that you need to have a good credit score to get the best rates and terms on a mortgage. But, many people don’t realize that their credit report can cause them to be denied financing, despite having a good credit score. It’s more important than ever to understand your entire credit history – not just your credit score itself.

Here’s a list of five things on your credit report that can prevent you from getting a loan approval, regardless of the actual score. The first four are pretty straightforward. It’s the fifth scenario that catches people by surprise and leaves them frustrated.

1. Having a bankruptcy in the past.

Most lenders won’t approve your loan if the discharge date of your bankruptcy was in the recent past. The rule of thumb used to be that you had to wait two years after the discharge date before applying for a loan. But, nowadays, Fannie Mae has tightened her guidelines even more: two years after the date of a Chapter 13 and four years after the discharge of a Chapter 7.

Here’s an example from a recent owner builder construction loan. The requirements called for a credit score above 620. The owner builder applicant had a score of 660. But, his loan was denied, because he had a bankruptcy that was discharged in 2005. With the new changes, he had to wait another year before getting approved.

2. Having a foreclosure on your credit report.

Similar to bankruptcies, a foreclosure can crush your chances of getting approved. Until recently, most banks would approve your mortgage as long as your foreclosure was at least three years in the past. But now, Fannie Mae is tightening the guidelines – you have to wait five years after the completion of a foreclosure. And, even then, Fannie Mae will require a 680 credit score and a 10% down payment. Otherwise, you’re waiting seven years after the date of the foreclosure!

3. Having old collection accounts on your credit report.

If you have multiple collection accounts from your past that are still showing up on your credit report, there’s a good chance that your credit score has recovered and is doing fine by now. But, if those accounts were never satisfied, a lender may require you to pay them all off prior to approving your loan.

4. Having a lien or a court judgment on your credit report.

If your credit report shows a lien or a court judgment in the Public Record Information section, then you might be denied financing until these items are satisfied. Here’s one more example from the world of owner builder construction loans. A recent owner builder wanted to build his new home, and he had a great credit score. But, the credit report showed a court judgment still withstanding from five years ago that had never been satisfied. It was a small, petty amount of money for a very minor dispute in the past. But, he had to pay the judgment before he could proceed with his owner builder loan.

5. Not having enough open accounts that are over two years old.

The first four scenarios above are pretty straightforward. It’s easy to understand that something negative like a court judgment or a foreclosure on their credit report could prevent financing approval. But, this fifth scenario is different. How could you possibly be denied a mortgage despite having a good credit score with no derogatory accounts showing on your credit report?

The answer is that the credit report might not have enough accounts showing at all. In other words, your credit score may be fine. You may not have any negative things showing from your past on the report. But, if you don’t have at least a few open accounts that are over two years old, then you might get denied financing.

For example, a recent owner builder applicant had a 673 credit score. His other loan qualifications fit well with the program guidelines. But, he was denied an owner builder construction loan because he had closed all of his credit cards. He only had one open account showing on his credit report. He thought at the time that he was doing the right thing.

In some ways, he was doing the right thing – he didn’t have excessive car loans or credit cards. He didn’t run up a lot of debt. He lived within his means. But, on the other hand, his credit report wasn’t showing enough open accounts to approve the loan. The owner builder loan was denied, because of a lack of current, responsible credit use (i.e., no credit use). In the case of this owner builder, his owner builder construction loan would have been approved with flying colors if he had simply paid off the credit cards, but left the accounts open with zero balances.

Therefore, when you are reviewing your own credit report, make sure you have at least three open accounts that are each two years old – with no late payments. This is tough for some people who are young and haven’t had the time yet to establish a lot of credit. In cases like this, the easiest thing to do is to get a few credit cards while in school. The tricky part is to have the discipline not to run up balances on those cards. And, in the end, that’s the whole idea – lenders nowadays are looking for evidence of responsible use of credit.