Getting a residential construction loan may be difficult than it used to be. This is because of the seismic collapse of the housing bubble, resulting in a world-wide meltdown of the economy.
Fanny Mae and Freddy Mac as noted in the page on Funding, are private companies which were originally chartered by the federal government to help lower income people afford to purchase a home. Recently they held or insured over half or the mortgages in the U.S. Their current status is still in flux (October, 2008).
Bankers want to make money by earning
interest on loans. They don’t want to be in the construction
business. So the banker will want to be satisfied that if he
lends you money to build your own home, you will complete the
task in an acceptable and timely manner, and produce a home
that adequately protects his investment. That is, one that is
to present yourself as a business person. It’s OK
to be excited about your new home, but try to give the impression
that you can make rational, coherent decisions about it . .
. that you are not running on emotions alone!
If you are unable to carry the project through to a successful completion, the banker may have to step in and do it himself to protect his investment.
If he has to take possession of the home at some later date - through a foreclosure for example (bankers always look at the worst possible case) - he wants a home that is saleable.
Your Cost Estimate and Constrution Schedule and the subcontractor and supplier contacts you have made while putting them together will help him see that you have prepared yourself and that you have the "right stuff" to pull it off!
2. Do you have an adequate “stake” in the project? - The banker feels like you are less likely to simply walk away from the project should something go wrong if you have something substantial (financially) to lose. He figures you’ll think twice before walking if you have some serious bucks on the line.
3. Do you have adequate financial resources to carry it off? - The banker knows that the draws will not always come in time to keep construction bills current. He does not want to be associated with a project that is plagued by tardy payments to subs and suppliers.
4. Do you have adequate income to cover the
permanent mortgage payments after construction is completed?
EXHIBITS TO TAKE WHEN APPLYING FOR YOUR
HOUSE CONSTRUCTION LOAN
Overcoming doubts by being prepared
The banker will scrutinize all of
the exhibits associated with your loan application. These will
include your own Financial Statement as well as the Plans and
Specifications for the proposed home. He will also be using
his people experience to size you up.
Here Are The Things You Will Need To Take When You Approach A Lender.
1. Plans and Specifications - Make sure they are as complete as you can possibly make them. The banker will determine the amount that he will lend based on the market value of the finished product.
The only way he can determine the market value is to have a complete set of plans and specifications. Make sure that a plot plan is included to show how the home will sit on the lot. Also, plan to have at least three crisp, new copies of the plans and specifications. Dirty, dog-eared blueprints make a very unprofessional impression.
2. A Survey and Legal Description of the Lot - The banker will be interested in the location, shape, zoning, and other aspects of the lot. He will also be interested in its value and the fact that you own it. At one time, bankers would not lend money to build a home on land that you do not own free and clear. Now, however, many banks will lend the money for both the lot and the construction of the home.
3. Personal Financial Statement - Make sure this is in a standard format - showing your assets, liabilities, and net worth. If you are working with only one bank, it may be good (or even required) to use their forms for the financial statement. Get your accountant to help you prepare it.
Make sure your financial statement is absolutely accurate. Don’t try to hornswoggle a banker on a financial statement. He looks at them all day long. He’s forgotten more about financial statements than you’ll ever know.
The banker is interested in your real position. If you’re deeply in debt or you have to rely on things like personal jewelry and stamp collections to make your statement look good, you had better start looking for a co-signer with some real assets. Click here for a generic form you can use.
4. List of Subcontractors and Suppliers - This will demonstrate that you are serious, that you have done your homework, that you know what you are doing, and that you are ready to begin.
It may also be helpful to be able to tell the banker some of the builder references you have on each sub. Even though you may not be an experienced builder, the banker will feel better if he knows that the project will be carried out by experienced, competent subs.
Your house construction loan will not be conditional on actually using the subs you present here, but don’t be deceptive. If you do plan to use your brother-in-law to do the plumbing, be prepared to explain why you think he is qualified to handle the job, and have a professional lined up and prepared to step in should the need arise.
Use our Subcontractor
Directory to organize
your subcontractor information. Also use our Subcontractor/Materials
Master List form. It is used to help you keep track of the subs
and suppliers you are using on the project. We’ve found
that it is very convenient to have them all down in one place.
5. Materials Take-Off and Cost Estimate - Again, this information, when presented on the forms we have supplied, will show that you are going about your building project in a very organized and professional way.
Have photocopies of this material available to leave with the lender if necessary. Don’t take your only copy. Review all materials before you go so that you are prepared to answer any questions that the lender may have.
Don’t be embarrassed if he asks you a question you can’t handle. By this time, you probably know more than 80% of the small builders he deals with. Just admit you don’t know, but that you’ll find out.
Path or Bar Chart) - Demonstrating
Many lenders may never have even seen one of these. You can have a copy available if the question should arise. Otherwise, this is something you may not need to submit. But don’t hesitate to show it.
OTHER REQUIREMENTS FOR THE LOAN
They will want you to carry a builder’s risk policy which essentially protects their investment should the home burn down during construction. They may also want you to carry a certain amount of liability insurance.
You should be adequately covered here, regardless of the bank’s requirements. Talk with your insurance broker. They may even want you to have an account at their bank.
Once the bank has approved your new home construction loan, they will issue a loan commitment, which spells out all of the details. Click here to see a copy of a Construction Loan Commitment issued by a Florida savings and loan.