Maverick Real Estate

Archive for the ‘Construction Mortgage’ Category

The number one mistake, hands down, that most people make when building their home is not allowing enough time to get through the process, especially for those people who are acting as an owner-builder and building without a general contractor.

Building a new home, and obtaining a loan to do so, is not as simple as going out and obtaining a mortgage to buy an existing home. You CANNOT do it all in 30 days. Period. Do not expect to do so. This pre-building and planning stage is often cited as the most stressful period of most people’s building experience.

If you are buying a piece of land and wrapping its purchase into your construction loan, then you must be sure you allow enough time to get to closing on your construction loan before your land purchase contract expires. Do not let the seller or the seller’s real estate agent pressure you into a 30 day contract. This can be tricky, as most sellers and agents have no idea of the construction planning process you will be going through.

They only know that the last time they bought or sold a house it took about 30 days. Therefore, you will need to negotiate more time to get to closing unless you already have finalized blueprints, budgets, and permits. Realistically, sixty to ninety days should be the minimum contract period for the land, depending on how well prepared you are.

As mentioned, this is tricky. The complicated part is that often you will not finalize your home plan until you decide on the land. Usually, this is due to the uncertainty of the foundation plan – does the land slope or is it flat. You will need to decide quickly if you do not already know this answer.

Now that you have decided on the land, you have a ton of work to do as quickly as possible. Getting your bids (properly) to complete your budget is the single most important thing you need to do in the whole construction planning process, especially for owner builders. And, it can rarely be done in just a couple weeks.

And to make matters worse, when the clock is ticking towards your contract’s closing date, you will often be pressured to skip a step or let some of the budgeting and bids slide. This is construction project suicide. Proper budgeting is vital to building a new home. Even if you are hiring a licensed general contractor to do the work for you, you will need to take the time to flush out the exact budget and sign a proper contract for all of the work to be done.

You need as much time as possible to complete your budget, understand the county building and permit requirements, perform any soil or percolation tests, and complete your loan documentation. Sixty days will seem to fly by.

If you cannot get more than 60 days on your land contract, you will need to have much of your budget already in place. This means committing to a home plan as early as possible and getting as many of the bids that are not dependent on the lot ahead of time. Then, you can focus on just the remaining items to complete the budget.

The best course of action is to get pre-approved for your loan once you have decided to build a home so that you know your maximum budget you can qualify for. This way, you can properly set a maximum price for the lot (based on what you have seen in the area) and then choose an appropriate home plan that can be built for the remaining budget or less.

You will now be able to complete much of the planning while you are shopping for land. You can even decide to only shop for land that is flat or sloped or that meets whatever other requirements you may have.

The important thing to understand is that these decisions, which may be some of the biggest of your life, must be made quickly if you have not planned correctly or if you are under the pressure of a closing date. Do everything possible to organize your project before the clock starts counting down towards the seller’s closing date.

Once you have a lot, a home plan and a budget, you will still need to complete the rest of the loan process. You will work with your loan officer and loan processor to provide the required documentation to complete the loan.

The appraisal and title work will have been ordered by the processor. You will need to schedule an appointment with the appraiser to review your plans and deliver the appraisal fee. You may also need to contact the closing agent to be sure they have all of your contact information.

While the appraiser and closing agent are doing their jobs, you will need to submit any remaining income documentation, asset statements, or other requested information. You will also need to arrange your insurance and permit applications during this time. As you can see, you will be busy. This is the trade-off for the chance to build the exact home that you want.

Once the appraisal, title work, budget, and all other required documents are in the hands of the lender, the file can be submitted to final underwriting. To be safe, expect that you will close in approximately ten days to two weeks from this point, barring unforeseen complications.

Another challenge with the existing home inventory on the market is the condition of the property.  Whether it is REOs, foreclosures, short sales, or not, less people are presenting homes for sale in pristine condition.

The FHA 203k loan can help. The 203k can give the buyer the ability to have one loan to purchase and renovate their home at the same time.

Similar to a traditional mortgage with a construction loan added on top, the 203k can be used for the following:

Remodeling bathrooms and kitchens (even built-in appliances)  Replacing a roof, gutters and downspouts Adding a second story, afamily room,another bath, etc. Completing a basement or attic Upgrading plumbing, heating, air conditioning or electrical service Installing new siding, energy efficient windows and doors AND MUCH MORE!

It is important to hire a general contractor that is familiar with the 203k process and requirements.  Advanced Restoration Corporation, a 203k contractor, was recently featured on NBC News4 New York regarding 203k loans, along with Continental Home Loans.

Streamlined 203k Loans

You are purchasing a home that needs minor repairs (repairs under $35,000 qualify for a streamlined loan).  Incorporating the rehab into your mortgage payment allows you to have just one payment. Some highlights include:

No work write-up, no inspection required if repairs are less than $15,000 and no HUD consultant required. Loan amounts up to 110% of the home’s appraised value; renovation amounts up to $35,000.  There is no longer a minimum of $5,000 in repairs for a 203K Streamline. On a 203K Streamline, up to 50% of the rehab amount can be requested immediately following the closing. After closing the work can start. For a 203K Streamline, there is a maximum of 2 draws per contractor. Loan can be used for many improvements, including repair/replacement of:  roofs, plumbing, electrical, flooring, minor remodeling, windows, doors, etc. Available for mortgage refinance transactions including those where the property is owned free and clear.

 

Getting a loan pre-approval from a lender is a quick, easy process. Typically, you fill out a few pages about your financial situation, the bank runs the numbers through a computer approval system, and you’re pre-approved the next day.

So, how do so many people mess it up so badly? Simply put, people lie (either to themselves or about themselves) when filling out a loan application.

We’ll look at examples from customers who applied for owner builder construction loans, but the principles of filling out a home loan application will apply equally well to anyone who wants a loan to buy or refinance a home.

Owner builder construction loans are for individuals who wish to build their own house without having to hire a general contractor. Therefore, they manage the sub-contractors themselves and oversee the project.

However, an owner builder loan application is no different from a standard purchase loan or refinance loan application. Almost every bank across the country will use a form known as a Uniform Residential Loan Application, also known as a 1003.

On this 4 or 5 page form, you simply fill in information about your financial situation. On the first page, you’ll cover simple info about the property as well as information about your address, phone, social security number, etc.

The second page will cover your work history and income. The third page will cover your assets and your monthly debts. All in all, the process is not difficult. In fact, anyone, whether you are an owner builder or someone looking to refinance an existing home, can fill it out without too much difficulty.

Therefore, the mistakes that are seen on owner builder loan applications be due to reasons other than misunderstandings. Indeed, almost every mistake occurs when an owner builder decides to embellish his qualifications or thinks it’s unimportant to be as accurate as possible.

You may be asking yourself why it’s such a big deal. Why should you care if you round off your numbers on the application? After all, it’s just a pre-approval. The bank will collect all of the real paperwork later on.

Here’s an example from a recent owner builder loan. A loan applicant decided the pre-approval was not worth his time to provide detailed information about his financial situation. He rounded up his income and failed to mention the child support payments that he is obligated to make each month.

In the case of this owner builder, the application was pre-approved quickly and easily. Why wouldn’t it be? On paper, everything looked great. But, when the bank started collecting the official income documentation and discovered the child support payments being deducted from the pay stubs, the borrower no longer qualified for the loan.

Not a big deal, right? Wrong. This owner builder had already put money down on a piece of land that he wanted to buy as well as purchased blueprints for his new home he wanted to build. Imagine the frustration and anger he caused himself when he found he was no longer qualified for the loan and he lost the money he wasted on blueprints.

Even though this is an example from owner builder construction, it still applies to anyone filling out a Uniform Residential Loan Application. Imagine you are buying a home and make a large earnest money deposit on the house you want based on getting pre-approved from your bank. Now imagine that your pre-approval is based on inaccurate information that you told the bank. In fact, imagine that you also wasted money out of your pocket for the home inspection and the appraisal.

So, what can you do? Whether you are looking for an owner builder construction loan or any other type of mortgage: tell the truth.

Do not think that embellishing your financial picture will help. It will only hurt you in the long run when the lender discovers the errors. You are better off getting an accurate pre-approval based on accurate information.

And, if you are unsure about your exact income numbers or your exact amount of assets, then estimate conservatively. That way, if your income or assets turn out to be higher than you estimated, you will still be approved and qualified for the loan program you are counting on. It works for owner builder construction loans. It works for refinances. It works for home purchases. It works.

In fact, one great piece of advice is to supply copies of your W2 forms, your pay stubs, and your asset statements when getting your pre-approval. Many customers, not just owner builder customers, don’t want to take the time to do this, because it’s a hassle. But, your loan officer can use these documents to ensure the pre-approval is based on accurate calculations. Besides, you are going to have to submit these documents for underwriting anyway.

For example, a recent owner builder borrower took the time to submit his pay stubs when he applied for his construction loan. A big portion of his income came from bonus pay. It turned out that he could only get credit for the average of his bonus pay over the last two years, in addition to his full base salary. Therefore, his gross income was calculated slightly lower for the loan that he thought it would have been.

In this case, the owner builder fortunately still qualified for the construction loan. However, you can see how miscalculating income can lead your pre-approval to be inaccurate. Therefore, don’t take any chances. Submit your documentation paperwork when you fill out the application.

So, if you are thinking of applying anytime soon for a mortgage for a home purchase or a simple refinance, then take a lesson from the world of owner builder construction loans. Do not discount the importance of providing accurate information about your financial situation on the Uniform Residential Loan Application. The pre-approval is a quick and easy process, but it’s also a very important one. Owner builder construction loans are no different in this respect.