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Construction Loans
Construction loans are a bit complicated and confusing. We’re still trying to figure them out after 2 years of planning and into our second application process. I’ve gotten a couple questions about them recently, so I thought I’d write a post with some info that might help others. This is just what we’ve experienced so far and it might not all apply for every situation or location. We recommend you talk to several banks and choose the one that works best for you. Along with your personal financial information, the bank will want your signed contract with your builder, the final budget, and the final house plans when you apply or shortly after.
Before the market crashed, most banks offered construction loans and it was possible to even get 100% financing. Now, hardly any banks offer construction loans and the majority of them require a 20% downpayment. We’ve found a couple that will take 15% down, 1 that will take 10% and a credit union that will take 5% down, but only on non-jumbo loans. By far, the majority want 20%. Regardless, if you put less than 20% down, you will pay Private Mortgage Insurance as part of your monthly payment.
We originally thought that the downpayment percentage was figured off the actual cost or appraisal of the house, but that isn’t the case. Here’s an example:
House cost: $200,000
Land Value: $ 40,000
Let’s say the bank requires 20% down. (For now, just assume the appraisal is equal or greater than the actual cost). 20% of $200k is $40k. If the land is paid for and it’s worth $40k, than you could use it for the downpayment, right? Nope. The bank adds the land value to the house cost which makes 20% even more. So, in this example, you would need 20% of $240,000 which is $48,000. In this case, the difference is “only” $8,000, but the larger the numbers, the larger the difference.
Our problem was that the first appraisal came back low. So, in this example, let’s say the appraisal for the house and land comes back at $150,000. They will finance 20% of the appraised amount since it is lower than the cost, or $120,000. The house is going to cost $200,000, but the bank will only loan $120,000. So, that’s $80,000 that would have to be brought to closing along with the $40,000 that was already paid for the land. If money is still owed on the land, that loan is usually rolled into the construction loan at the beginning.
It used to be common to have 2 closings with a construction loan. One at the beginning for the construction loan itself and one at the end for the final mortgage. The downside to that is you have to pay closing costs twice, but you often had the option of your permanent mortgage being with a different bank than the one you used for the construction loan. Almost every bank we’ve talked to only offers single close construction loans now. There is a closing at the beginning, then you just sign a couple forms at the end of construction to turn it into a regular mortgage. Only 1 set of closing costs to pay and no closing to deal with once the house is done, but the loan stays with the same bank the entire time. The bank we are working with now is the only one we’ve found that does 2 closings, but the second closing is minor (and less expensive) compared to the first. The loan will stay with the same bank throughout and there is no option to get the final mortgage with a different bank. 2.5% closing costs seems to be the average we’ve found. In the above example of $240,000, this would mean having $6,000 to bring to closing.
After the closing, the bank will give you a certain amount of time to finish the house (usually up to 12 months, depending on the project) and a certain number of draws on the loan. If the bank loans you $200,000 to build your house, they may allow 6-8 draws during the construction period. You’ll be given a certain amount up front to start the project. If they give you $40,000 to start, you will start making interest only payments on the $40,000 each month. The bank will send someone out periodically to check on the progress (our current bank does this twice a month). They will not allow you to draw anymore money until the appropriate percentage of work has been completed. Obviously, this is to make sure they don’t give you the full $200,000 and only half the house is done. Once the amount of work relative to the amount of money they’ve given you so far is complete, they will allow you another draw of the $200,000. If they give you another $40,000 (just an example), then you will now be making interest only payments on $80,000. Repeat until the house is done. Once the house is complete and all the money has been drawn, it will convert to a conventional mortgage and you’ll pay principal and interest like normal. I should also note that the interest rate on construction loans is typically higher than a conventional mortgage.
Summer Tour Of Homes
Since there isn’t much else going on now, I decided to join in with the Blogger’s Summer Tour of Homes. Since our current (rental) house isn’t permenant, you wouldn’t want to see pictures of it – boxes everywhere, etc. I do have a lot of good pictures of our old house though, so let’s tour it!
It was a builder’s spec house that we bought shortly after it was finished. The entire house was yellow when we moved it except for the hall bath, master bedroom and master bathroom which were sage green. (Our rental house is almost the same yellow and I hate it.) We repainted everything except the garage. The interior style is very typical for this area, but very different from how our new house will look. The floor plan is the Frank Betz Chapman with some minor modifications.
We used the formal dining room as the piano room. We painted the walls with the Valspar Brushed Pearl faux finish and I made the curtains since the window was so big.
We originally painted all the main living areas Sherwin Williams Window Pane – a pale silvery blue. Everyone loved it. A big debate while we were selling the house was whether we should paint it a more neutral color. No one ever complained about the color specifically, but we did get comments about the house feeling “cold”.
After 14 months on the market, we finally painted it Behr’s Perfect Taupe. We sold the house 2 months later. Can’t say for sure that the color change made a difference, but it did completely change the feel of the house. While everyone liked the blue, the Taupe was really popular too.
The kitchen had maple cabinets with a cherry stain and mocha glaze. The countertops were Uba Tuba granite with a tumbled marble backsplash with matching granite accents.
The foyer chandelier was originally hanging over the kitchen table. That window gets full morning sun and it was always unbearable in there. Ceiling fans may not be popular, but this one was always on and much needed.
The Kid had the back bedroom which was the largest. David and I made his bed, the dresser is from his crib furniture. The wall color was SW Fleur de Sel – a very pale gray.
The hall bathroom was painted SW Reticence.
The middle bedroom was our second guest room. I made the bed and nightstands. This room was really small, but had a walk-in closet.
The front bedroom was our office. We put shelves and outlets in the closet so all our network gear (router, modem) and printers were hidden in there. We will have something similar in our new house, but they will be in a walk-in closet. The wall color is SW Mindful Gray.
The master bedroom was on the other side of the house and HUGE. We don’t spend much time in our bedroom so the space would have been better used elsewhere. The walls were painted SW Tavern Taupe and the tray ceiling is the 2 shades lighter than it – SW Stone Lion and SW Loggia. The ceiling fan was a Casablanca we brought from our old house.
Both the family room and master bedroom had rope lights in the tray ceilings.
The master bath originally had an awful fiberglass shower. It had 2 seats in it which left about 1 square foot of space to stand. The door was also hinged so it partially swung in, which made it even worse. We should have done it a lot sooner, but we finally tore it out about 2 years before we moved. We used the same tile that is on the floor and tub surround, but accented it with $5 glass mosaic from Home Depot. I painted the walls a pale green to match a glass bottle soap dispenser I bought. I believe the color was Valspar’s Ocean Buff.
We put the Ikea Pax system in the closet with the Komplement interior organizing pieces.
The laundry room paint was SW Sprout – a pale silvery green.
The stairs to the bonus room:
The bonus room was painted Valspar Smoked Oyster and we painted the staircase one shade lighter – Valspar Oatlands Subtle Taupe. We used this space as our main guest room. It worked out great since all of our family was out of state. They had their own space, including their own bathroom, upstairs away from the rest of the house.
The door on the right was a walk-in closet.
The bathroom was painted Valspar Oatbran.
To view virtual pictures of our new house, click HERE.
Not Meant To Be?
As usual, the appraisal took longer than expected and it ended with another crushing blow to our plans to build. We had hoped it would be finished around the 19th or so, but hadn’t heard anything at that point. We checked in a couple times the following week and was finally told that Friday that they were typing up the report then. The bank said they didn’t know what the final amount was, but if there had been any problems, they would have heard about it before then. They said they planned to call me early the following week to schedule the closing. We breathed a huge sigh of relief and I began to get excited about the possibility of closing on the loan this coming week and finally seeing the house get started. Monday, I went to the health department and finally applied for our septic tank permit. That is supposed to take up to 15 working days. We finally heard from the bank on Thursday and they said they were getting some questions answered by the appraiser. We thought that was strange since it was supposedly ok. Friday afternoon, I got an email from the bank saying that the appraisal came back significantly lower than what we needed. I was blown away since we had spent the past week under the impression that it was fine. I called the bank and he said that the appraisal was originally even lower, but he had gotten the appraiser to come up to this final amount. The bank will only loan us 85% of the appraised value, so we would have to come up with the difference (which we don’t have).
They emailed us a copy of the appraisal later that afternoon which made us even more frustrated.
- The 5 houses he compared ours to are all in neighborhoods and on less than an acre (we have 4 acres). I know for a fact that at least one was a builder’s spec house.
- Our house and the comps were all rated as “good” construction despite our house being built with ICF, spray foam, etc. He also had “None” for energy efficient features in our house and the others. We know that we likely won’t see a 100% return on the ICF and other upgrades, but it should at least be a consideration in the value.
- He stated that the real estate market is “stable”, yet he appraised our land for 13% less than it appraised for 2 years ago, which was before it was cleared and we did other work to it. His number was also less than we paid for it.
- He has our land listed as “country” (decreasing it’s value) although he notes that we are only 2 miles from shopping and schools. While we are in a rural setting, there is a huge neighborhood development 1/2 mile in one direction and the major city limits 1/2 mile in the other direction. We’re fairly confident we will end up within the city limits at some point.
- There were a handful of other minor issues that would all effect the value.
I forwarded the appraisal to our builder to see if he has any ideas or suggestions. I also emailed his wife (a Realtor) to see if she’ll email us a report with all the sold listings on over an acre from the past year, so we can see what comps the appraiser didn’t use. We would have to cut down the size and/or finishes considerably to get the cost down enough, but that would also just reduce the value even more. David’s first thought was to finish the extra space on the 2nd floor. If we did it outside of the loan, it would add 2 bedrooms, a full bath and around 1000 square feet while not increasing the budget. We emailed the bank with that idea and are waiting to find out if it will make enough difference. We already planned to have those rooms framed with electrical and plumbing, so finishing them the rest of the way on our own shouldn’t be a big deal.
We knew building wouldn’t be easy, but we never dreamed all the problems would come before we ever broke ground. It’s been over 2 years since we first put our house on the market and we’ve been in the rental almost a year already. 3 days ago, I thought we would be breaking ground within the next month. Now, we don’t know if it will even be this summer or this year. Everyone says it will work out, but part of me wonders how much longer we should go on before we give up. The problem is that we have so much invested already – over 2 years of designing the house plus the cost of having the final plans drawn up, the land and all we’ve put into it, etc.
For now, I guess we’ll see what the builder and the bank has to say. We will probably contact a local credit union we talked to before. They will allow us to finance a larger percentage, which will work out even with this low appraisal, but they couldn’t guarantee us that they’d do the loan we need. We also weren’t impressed with their customer service. So, it’s hard to say how that will turn out. I found a few other lenders that I will call tomorrow, but it’s hard to find any that do construction loans anymore.
Waiting…
I dropped off a check for the appraisal on Monday. They should be working on that now and it will hopefully be done before the end of the week. He also asked me if we had a preferred closing attorney which surprised me. I hope that means we can close soon if the appraisal comes back ok. That’s still a big “if”, but I’m glad we should only have to wait a few more days to find out.
David had to mow the land this past weekend. He had hoped he wouldn’t have to, but we didn’t get the construction started soon enough. The Kid and I joined him as he finished up on Sunday. I took these pictures from where the start of the driveway will be.
The house will go near the middle of this next picture. The back corner will be near the tree with the big top near the middle.
The house in the next picture is our closest and most visible neighbor. I plan to plant some landscaping once the house is done so we can’t see their house as well and they can’t see us.
There are a lot of trees growing in the burn piles now. This one is about 6′ tall and I’m trying to figure out if it’s another walnut tree. There’s another one like it and I’m tempted to dig them up and move them so we can save them. We have a handful of good sized walnut trees that are in the way of the house. I’m tempted to see how much it would cost to move them out of the way instead of cutting them down. Walnut trees can be worth a lot of money so we wouldn’t mind growing some for future use. I hate to lose the ones we already have since they are already started.
Door Color
We continue to wait as the bank processes our loan. They have approved our part of it. Since we are using the farm bank, we were going to get their “rural home” loan, but they had to change it to their “farm” loan. One of the requirements was that we write up a proposal for projected farming income. It could include anything from livestock, beehives, produce, a greenhouse, etc. Since I already moved 9 of my rose bushes out there and plan to add more, we used that in the proposal. We also mentioned our plans to plant walnut or other hardwood trees out there for future income. They accepted our proposal and are working on getting the appraisal started now. It would be great if that gets completed in the next week since it is our last big hurdle. I’m still really worried about whether the appraisal will come back high enough for us to get the loan. It could easily go either way.
In the meantime, we have been staying busy with other things. The Kid is finishing up school and D is finally working less which has been really nice (by less, I mean 40 hours instead of 70). I’ve continued to work on things for the house occasionally, but it’s with great apprehension until the loan appraisal is completed. One question I’ve been contemplating for a while is what color to paint the interior doors. Obviously, the standard is white to match the trim. I’ve seen pictures of several houses with black/charcoal doors though and I like it. Downstairs, our doors will be 8′ tall which I love. (Upstairs, they’ll be the standard height). Here are a few inspiration pictures.
Our doors will likely have 5 recessed panels with chrome levers, like the pictures below.
I tried changing them in my design program to see how it looks, but it didn’t really help much. Our doors are mostly spread out and several are pocket doors which won’t really be visible when open (which will be most of the time).
White would be the safe choice, but I like the richness of the black doors. Black might show the dust, but white does too along with dirty handprints. I think the price difference will be negligible. Any thoughts?