#1 and #2 are the most common misconceptions in building or remodeling today. If you are thinking about new construction, I advise my clients to take advantage of available lot financing programs with small down payments because they will need cash reserves to qualify and to fund a home building project. Frequently, borrowers spend all their savings on their land, plans and permits, leaving themselves cash poor. Also if you want to take cash out of the property to replenish savings by refinancing after construction you must "season" the loan for one year. Another issue is that if you have spent a significant portion of your reserves on lot acquisition, the loan may be more difficult to make due to a lack of liquidity. Remember, if you do not yet own the property and plan to build soon, the Construction/Perm program will allow you purchase the lot or existing home with your first draw.

How can you determine what and if you should build or remodel without understanding the financial impact! Unless you are going to build your project entirely from your own savings, you will rely on funds from a lender. Many consumers plan their whole project before consulting a construction lender. They invest years of time and thousands of dollars, only to discover they made vital mistakes along the way, restricting the financing of their project or stopping it altogether. I will help tailor your financial picture to meet current construction lending guidelines, ensuring your qualification for the best and most appropriate construction and permanent loan program.

One of the major factors in current construction lending guidelines is the appraised value of the finished property. The appraiser evaluates the property for market value and conformity with houses in the neighborhood. In order to determine fair value for a lot, you need to make sure that your home is consistent in size and quality with houses nearby. Over or under building a neighborhood can cost you cash and equity. The fair value for a lot can only be determined within the context of a finished home. Many borrowers have purchased lots for what they thought was a great price, only to find out that the home they wanted will require significantly more cash than they have available. I will work with you and the appraiser to make sure the project makes sense for the property and neighborhood. Also, remember the Construction/perm or Renovation loans will allow you to use the first disbursement to acquire the lot or house is you are planning to remodel.

There are many factors to consider when determining the right loan amount. Many people consider their home loan separately from the rest of their finances. A home may be your largest asset, your largest liability and your best resource for tax reduction. Your mortgage payment will insure or disrupt your ability to sleep at night. The size and type of permanent loan should be determined within the context of your entire financial picture.

While the permanent loan size is a factor in financing your home, it is less important than the financial structure of the project itself. Between your savings and the loan, you must have enough money to cover the entire cost of the project plus any overages. 

Unfortunately some building projects run over budget. It is better to plan for more than you think you need since you can always modify to a smaller permanent loan if all of the available loan proceeds have not been spent. 

When you purchase or refinance a home, the process is over when the loan funds. With a construction loan, it is only beginning. The success of your project will depend on how well the 6 - 12 month disbursement procedures meet your finances and your builder's style. A problem in this area could cost you months, thousands of dollars, maybe even your project. The variables in qualifying for a construction loan are ten times that of a purchase or refinance loan. 

Lack of knowledge and experience by some loan officers are the reasons that as many as 40% of all construction loan requests are denied. Many lenders and brokers dabble in construction, but have not processed enough construction loans to understand the intricacies of the process. Our construction loans are underwritten and closed by our construction department employees who are not involved in any other type of lending so that your loan will close and disburse correctly and on time. That having been said, my expectation is that construction loans of all types are extremely competitive with any other lender in the country.

We understand that you will probably not have sold your current home before you begin building and the fact is built into our underwriting guidelines. One method of addressing the issue is to use a fair market rent calculation to offset your current mortgage payment. Also, if you have a significant equity in your current home which you need to unlock to begin your project, I can help you with a refinance, equity line, or second trust as your situation may warrant.

Most people have never experienced the home building or remodeling process. No lender will  value the property based solely on how much money was put into your project. We will account for the money you have contributed, but the weight of the underwriting decision will be made on the conservative appraised market value. Many clients find their new home has appreciated in value significantly during construction realizing instant increases in equity.

I have a newsletter giving a complete description of the Home Improvement/Renovation Financing programs which is available by email.

As a Certified Mortgage Planning Specialist, I offer an analysis of your situation today can make suggestions on how small changes in how your consumer and mortgage debt is structured today can have a life changing effect in the years to come.  Read more about this free, no obligation service.

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