Construction loans for BUILDERS

 Loans available to builders …

1. SPEC loans – tax return income based – 90% of cost (land & build) or 80% of sales price (which ever is lower), 7-9% interest rate, 12 month loan, can be extended, income based, interest payments monthly based on amount drawn so far. (APR is 11-15%)
2. SPEC loans – not income based – 85% of cost or 70% of sales price (which ever is lower), 10-12% interest rate, 12 month loan, can be extended, income based, interest payments monthly based on amount drawn so far.
3. Buy & Flip – 90% of cost or 80% of full value (which ever is lower), 7-8% interest rate, 12 month loan, can be extended, income based, interest payments monthly based on amount drawn so far.
4. Contract Build for residential client – 90% of cost (land + build cost +loan costs) or 90% of appraised value (whichever is lower)

Income based or non income based? – Income based loans go off monthly income based on tax returns and W2 paystubs. Non income based loans are based on the number of properties recently sold and the sales price for SPECS or monthly rental income for rental property.

How does a construction loan work? – Money is drawn out from the loan as build progress is made. Monthly interest payments are due as money is drawn.

Can I roll loan costs into the loan? – yes, just add the loan costs into the construction budget and label it “loan costs”

Can I get a construction loan with $0 down? – Yes, if you have equity in the land or if you are willing to have a CD with the investor. But remember that $0 down is not the same as $0 in the bank. You will need to have cash reserves (usually $15,000).

Can I be my own builder? – Yes, if you have building experience. If you dont have building experience, you will need to hire a builder or contract with a owner participation building company.

Is a Builder of Record needed? – In Texas all residential construction loans need a “builder of record”, but builders do not need to be registered with the state. There are state and investor requirements for builders. The state requirement is that a different entity (corporation or individual) must be the “builder of record” the investor requirement is they have to be a “reputable” builder (different investors have different definitions of “reputable” builder, a very few allow it to be your mother/brother/friend (but it does exist), and most require it to be an experienced builder with a good reputation among their subcontractors and suppliers). This means that if the investor is not familiar with the builder, then the builder will need to fill out a “builder application” that has basic info about the builder and a list of homes built and contact info for suppliers and subcontractors.

What does it take to qualify for a construction loan? –
Down payment – 10%-20% of total cost (land + construction budget + closing costs) (*some investors do not allow closing costs in budget) (again land equity usually counts toward down payment)
Reserves – 2 – 6 months of PITI for current homes/land + new home completed and taxed
Credit Score – mortgage credit score is calculated by a mortgage credit pull and using the middle score and taking the lower score if there is more than one borrower
– – – 700+ all investors accept this score
– – – 680+ most investors accept this score
– – – 660+ several investors accept this score
– – – 640+ only a few investors accept this score and the loans are looked at more carefully
Debt to Income Ratio – this ranges from 35% to 50% (again depends on the lender but most are at 38% to 43%) and is calculated by adding all you credit card minimum payment + car payments + house PITI + new house PITI + monthly payments on school loans and other loans/committments divided by monthly gross income (after expenses for self employed)
Appraised Value – the value of the house and land when the house is built is appraised by a certified appraiser must be worth more than the cost (* if the cost is more than the appraised value then the investor adjusts by lowering the loan amount)

How long does a construction loan take? – approximately 2 months.

Do you handle OTC (One Time Close) construction loans? – Yes we can handle these. As with any loan there are advantages and disadvantages.

What are the advantages and disadvantages of a OTC (One Time Close) construction loan? – The advantage is you save $2500 to $5000 in closing costs for a permanent loan (* savings depends on loan amount). There is also an advantage of no or less qualifying for the permanent loan. There are “costs” for the permanent loan that are collected when the loan modifys unless they are collected up front when the construction loan closes. The disadvantages is the permanent loan is not always a 30 or 15 year fixed loan, there are 5/25 or 7/23 or 10/20 versions where the loan is fixed for 5 years and the rate adjusts for 25 years or 7 fixes / 23 adjusting or 10 fixed / 20 adjusting. The other disadvantage is that all the OTC loans I have seen have slightly higher interest rates during the permanent loan, this eats away at the saving of two closing costs. The other disadvantage is that if you want to do an owner builder loan, the only one available is the 5/25 or 7/23 or 10/20 construction/fixed/adjusting loans. So the OTC is perfect for the person planning to be in the loan less than 5 or 10 years, but not so good for those in the permanent loan long term.

Do you handle TTC (Two Time Close) construction loans? – Yes we can handle these. As with any loan there are advantages and disadvantages.

What is the application / underwriting / paperwork process? – The process is as follows …

1. Fill out and send us a construction application
2. Pay for a credit report or provide a trimerge recent credit report
3. We pull your credit and do DTI calculation and LTV calculation and send file to underwriter for boarder line issues)
4. You finalize your house plans (plans should take between 3 weeks and 2 months)
5. We send you fully typed loan application and disclosures to sign and return
6. You send us income, bank, and other documents related to the contract, budget, property and loan
7. If buying land with the transaction then you send us land purchase contract (it is recommended to put a 60 day (or longer) close date for the land close
8. You send us a check for the appraisal and application (application fee refunded when loan closes) (some builders do appraisal after construction budget step) (appraisal takes 5-10 work days)
9. You send us builders contract
10. You send us 1-3 page construction budget
11. We but all the loan information together and package it up for investors
12. We submit to our investor’s underwriters (it sits there 1-5 days)
13. Underwriters send us loan conditions and we contact you
14. We gather conditions from you & title & appraiser & your employer & payoff information (this takes 2-3 days)
15. Underwriter submits for review of final approval (this takes 1-2 weeks)
16. Title and investor prepares closing document (this takes 1-3 days)
17. We schedule date and time for closing and let you know the final closing costs along with the amount of check to bring, if any
18. You normally see the HUD settlement statement the day before closing
19. You come to closing with spouse and sign final loan documents and agreements
20. Bring bank check (made out to title company) or wire money to title company for cash to close, if any
21. Bring drivers license for all borrowers and spouses
22. Loan is normally funded that day or the next

When closing the permanent loan will construction cost and the remaining balance on the land (32K) will be rolled into a conventional mortgage?
Yes but the land is also rolled into the construction loan. Remember there is the OTC (One Time Clost) and TTC (Two Time Close) options. With the TTC there is a construction loan and a permanent conventional mortgage. The construction loan is not a conventional mortgage but a 12 month mortgage.

If we do roll these closing costs into the loan (assuming this is possible), can this still be done so that I don’t have to use 20k at closing?
We because you will have to have at least 10% “skin in the game” and your current “skin in the game” is $9000 ($41k – $32k) you will need to bring some more money as a down payment or “skin in the game” to the construction loan… around $13k is my guess.

We don’t quite understand the cash outlay we should be anticipating prior to the construction loan, the amount we should be spending out of pocket during the construction loan process, and what we should anticipate bringing to the table at closing. Can you shed some light on this for us?
Cash outlay is approximately this
House Plans – $3000 – $5000
Soil Testing – $0 – $1000 (builder dependent)
Builder Startup/Deposit – $0 to 20% (builder dependent)
Construction Appraisal – $600 for loan appraisal / application
Construction close – $0-20% for down payment at construction close
Construction close – closing costs – is possible to roll into loan
Permanent close or modification for OTC – closing costs – is possible to roll into loan

For a OTC (One Time Close) I don’t undershand how there could be any costs associated with the permenant loan? Please explain.
The permenant loan has a modification at the time the house is finished and the permanent rate is set. Different investors have different fees at “modification” time. Usually the investor is keeping this loan but more likely if it is a 15 or 30 year fixed loan then they are selling the loan and making 1% – 2% when sold depending on what interest rate the loan is at. Here are some possible OTC perm loan fees…
– $300 to $500 modification fee
– 0.25% of loan amount escrow waiver fee if you are not escrowing taxes and insurance monthly with the lender
– 2 to15 months of taxes or hazard insurance for the reserves if you are escrowing taxes and insurance monthly with the lender. the big variance in the amount of months taken depends on how soon the taxes or hazard insurance is due.
-$0 to $250 for mortgage insurance (but this is a rare circumstance)
– $329 Title modification fee (but this is a rare circumstance on a OTC)

When can I “lock the interest rate” of the permanent loan rate? –
Locks on 15 & 30 year fixed loans ….
Fannie / Freddie “lenders” have 15, 30, 45, 60, 90, etc locks
30 day locks are “free”
Sometimes a 15 day lock will yield a 1/8 point better rate

Remember when converting a construction loan to a permanent loan there is a “3 day right of rescission” that actually takes 5 days (not including Sundays). This has the effect of making a 30 day lock a 25 day lock.

45,60,90,+ day locks have a “cost” associated with them
The longer the lock the higher the cost
This differs from lender to lender
This must be paid for in advance
This is not refundable
This does not guarantee the loan

One lender’s fees …
60 – 0.7% in fees
90 – 0.25 in rate and 0.5% in fees
120 – 0.375 in rate and 0.8% in fees
240 – 0.625 in rate and 1.3% in fees

You mentioned a number of requirements of the construction lender as to upfront payments, and some variables.  I wasn’t able to make notes.  I know we can’t really have an accurate discussion until we get the appraisal back and review it relative to value of the lot we own free and clear, plus $18K we’ve already paid, plus $288K construction budget and $14K contingency going forward.  But in general, if you could please outline what you had mentioned about 20% down payment, buying a CD ahead of time, etc., that would be helpful. With the lender in your particular area that handles owner builder construction loan …. take lower of total cost of land & construction, then you have two options…

1. take 80% of that amount, that will be the loan amount, the rest you need to pay for
2. take 85% of that amount, the interest rate is 0.5% higher, that will be the loan amount, the rest you need to pay for (P.S. this requires approval by lender)

(PS if you bring $ and place in CD with lender you can increase the  construction loan amount by the amount of the CD)

One Owner Builder Adjusters to Interest Rate

You mentioned that the construction lender requires that the amount of the loan be as great or greater than the amount of loan on the perm.  In dollars or percentage LTV?  I was under the impression from previous discussions with construction lenders that the exact amount of the perm could be decided later.  We do prefer to have at least 20% downpayment for the perm to avoid PMI, but I didn’t think that we had to make that decision now. Please elaborate? It is typically advisable to make sure the construction loan is equal or greater than the desired permanent loan. The reason for this is because if the permanent loan is larger than the construction loan then it is technically a “cash out” loan which runs into fee problems and problems when you get above 80% of appraised value and a higher rate since lenders consider cash out loans to be higher risk. Both the permanent and the construction loan is evaluated before the construction loan closes, and both must “work” from the beginning (in other words there needs to be a “home” for the permanent loan at the start of the construction loan. Yes, the numbers (appraisal, amount borrowed, interest rate) will change after 6-7 months of construction, so they will need to be recalculated when preparing the permanent loan.

Can I roll loan costs into the loan? – yes, just add the loan costs into the construction budget and label it “loan costs”