A good builder will assist you in securing a construction loan for your custom home project. Knowing what you can qualify for on a mortgage is a big part of the puzzle regarding building a new custom home. A good builder will often recommend to clients that if they haven’t already done so, to make sure they get pre-qualified for a mortgage. That will allow them to arrive at a reasonable home budget. A good builder will be able to recommend several lenders they have worked with or will allow you to use a lender you already know. Determining this initial budget should be the first step in arriving at a lot and home design that will work for you.
Good custom builders are well-networked and can involve a lending team that can get your custom home deal funded in a smooth manner. Many banks right now are not doing construction loans, so it is important that you touch base with your builder and make sure he works with lending institutions that are doing construction loans.
All construction lenders right will give preliminary approval based on a budget but will make the final approval contingent upon the appraisal. There are also many things the lender will review, including your credit score and your income before making a decision to loan you the amount requested. The lender will require a deposit or a lot to substantiate the construction loan. Typically the deposit or lot must be approximately 20 to 25 percent of the loan value. The lender will typically lend up to 70 to 80 percent of the appraisal value. Appraisal values can be the final reason for a declined construction loan, so just be aware nothing is “a sure thing” in these times. In order to get an appraisal you need plans, specifications and a budget (including a lot budget). Below is a brief outline of the process:
During your initial meeting with your builder your budget needs to be discussed. Lot prices vary drastically with area, so your budget and your builder’s knowledge of prices are important for you to find the right area of town for your budget. If you already own a lot then just the house budget needs to be clarified. The lot size and location has a broad impact on your home. If it is raw land then you may need a well or septic, it may need an engineered pad site. You may be required to get a hydrology study performed so you can receive a permit. You want to avoid a flood plain issue. Your builder needs to be well versed in all these potential aspects. If you have or like a developed lot or city lot, you should have all your city utilities, but that should be confirmed.
The lot size obviously impacts the design of the home. Zoning needs to be confirmed so that your design will be within the required setbacks. Your builder should be familiar with the lot or building requirements in the area. All the above items can have an impact on your design and budget.
Once you have figured out your home size, have zeroed in on a lot budget, and have checked for availability, you are ready for the design process. The design of your home needs to stay within your budget. Most builders have a designer or architect they work with, and can either help facilitate the whole design process or have you work directly with the designer. Your builder should be able to help critique and give pointers so you have cost ideas or figures in mind as you design. From your conceptual design your builder should be able to get you an initial budget with some contingency for error. If you, the lender and the builder are comfortable with the budget you can move forward with the design. Depending on your preference good custom builders will manage this process for you and help you select an architect / designer so you don’t have to piece together the process yourself. Typically depending on each client the design process should take around a month.
You should still be on track with your lenders pre-approved budget. And now you have a plan that can be permitted and built. Plans run between $ .75 to $ 1.00 per SF for designers or more for a certified architect.
Now you have a plan and a lot selected. Now it is “solid budget time”. A good builder will focus on transparency in pricing for their clients. Expect a good builder to go over all your specifications and discuss your “must have” items and your “want to have” items. A good builder will be networked with good local subcontractors and trades so he will understand the best options for putting together a cost-effective high-quality project. Good builders have a list of pre-qualified local contractors and trades so they can select the lowest bids from a group of qualified trades. After the builder obtains his trade bids, he will assemble the final budget for review in a sit down meeting to discuss options and review the pricing.
Next it is time for the appraisal. You already have plans, a true construction budget and a lot budget. The bank will charge an appraisal fee, typically around $500, and hire an appraiser. To keep things legal with the newer guidelines, the bank and builder are not supposed to have a close relationship with the appraiser.
If the loan is approved, you can move forward. If not, then you haven’t wasted too much time and money since you followed the steps in the right order and didn’t spend any more money than needed to get the basic answer “can we get approved for this”? You can also try different lenders of course and if you are using a good custom builder they will act as a consultant and be able to steer you to the lenders that will be most likely to get you approved.
Another option is go to the designer/architect and revise the conceptual design to be more modest/ inexpensive. A good custom builder can really assist at this point since years of expertise can provide good ideas to reach a design that is affordable but still meets your overall design-build goals at the same time.
It is not unusual for any one of the steps in this process to have to be done multiple times to get the needed result. If you stick to this process you can be assured that when you complete the design phase, you will be able to build your new home on budget, get funded and meet your design-build goals.
These steps may seem like a lot to digest, but a good builder and lender should be able to make it pretty simple for you and help answer any questions. When in doubt make sure you select a builder with years of experience and most important, choose a builder you feel comfortable with.