Well I am sure the lending pros will be along soon and offer some great advice. I built a house in 2019 and am building one now. A few overall key points I can offer:

1) Do NOT get a "traditional" construction loan. Get a one-time close construction loan that automatically rolls into the permanent loan upon completion. That saves in closing costs and worrying about rates. But make sure that they have a float-down feature that allows for them to adjust the rate should it drop by the time that you are finished building. But that will protect you from any future rate increases.

2) Yes, land equity goes straight into your overall equity and can count as your down payment. Also, any cash that you have into the place (such as the deposits for the home) count as well. However, the lender will go off of the appraisal that they setup and then apply this value, so it will depend on the appraiser. I bought a lot in a neighborhood and paid cash in my first build. I never put any cash down payment on the construction or permanent loan due to the amount I already had in the equity. This can also work out great in the event that the entire package appreciates over the time of the build. I currently have two lots and they have almost doubled in value from when I bought them in April 2020. So when I close on my current build then the lender will count the value of everything towards the down payment. I also plan to put more cash into it.

3) Be absolutely ready to review your contract inside and out. Check escalation clauses on materials like concrete, lumber, etc. Also check for escalation clauses in actual finish materials, such as lighting, flooring, etc. My current builder agreed to remove the concrete and lumber escalation clause but I am getting hit with other material increases. Be ready for whatever price they quote you on everything to go up. Builders always find a reason, legit or not.

I could type a novel but I will stop there for now. Good luck with the build. It is stressful and exciting. I feel like I would be shocked if your builder stayed on a good timeline, but now that building has slowed down, maybe they will. But expect delays. I hired my builder in April 2020 and said the house needed to be done by summer 2021, which they said it would be. We are in September 2022 and it is just now getting framed. It will take us two and a half years to complete the home and it has been a journey. But in the end, it will be a beautiful home for my wife and I.

Most lenders have LTV (loan to value) standards for development loans. These standards can and do change over time. For an owner occupied loan, you probably can get 75-80% right now, but that could and will likely change with the direction of the economy (if things go downhill, lenders will tighten standards and make you put more money down). To build, you'd be required to put up the equity to get you to up to their LTV amount, and then the lender will come in with draws.

Example:

You bought a $500,000 lot and put 20% down, or $100,000, and have a $400,000 note on the lot. You want to build a house that will cost $500,000 more. Your lender will do a max 75% LTV loan. So for your construction planning, you will need to have $250,000 in equity in the deal, so you'd be required to pay the first $150,000 of the construction process, and THEN the lender will kick in and start funding construction.

Every lender is different, but this is typically how the process goes. I'd go with a local, community bank for a project like this.

GAC06 said:

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Thanks for the responses so far. I understand the benefit of a one time close construction loan but a complication is that I'd like to do a VA loan if possible and will exceed the limit of a VA construction loan. Also we'd like to use our current home to bring down the final loan amount.

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I had to do the exact same thing since I went VA. It was tough finding VA construction loans...they exist but I coudnt find anyone I liked so I bit the bullet and did a construction loan and then refinanced into my permanent financing through another company. You want to do that about 60 days out from completion.

I am retired from the military and I am a mortgage lender in Tyler...licensed in Texas so I would be happy to be a resource to help in any way I can, regardless if you go with my company or not. Feel free to reach out any time with questions.


bbailey@gomycity.com

Brian
903-574-zero nine six zero. welcome to call or text me anytime

I don't know anything about VA construction loans nor do I have any suggestions on who might help you with that. When we looked at it and the associated red tape we passed. We do however do a lot of one time close construction lending6. +/-630 houses currently under construction that we're financing.

Construction financing is a specialized type of lending. It involves multiple processes simultaneously.

1. It may involve refinancing an existing lot loan into the permanent mortgage.
2. The construction loan piece which has some different requirements than a traditional mortgage.
3. The permanent mortgage which closes simultaneously with the previous two and in a single transaction. The mortgage closes before construction has begun.

As you might expect compliance and disclosure requirements are different and more involved than traditional mortgage loans. That, along with a few other reasons is why there is a smaller number of providers than for traditional mortgage.

Just my opinion but I would be looking for a one time close construction lender that is active. I would ask how many projects they currently have going? How many have they closed in the last year? Do they have a full time staff to handle draws and inspections? Do they fund draws for work not yet complete?* Do they fund deposits on special order items like windows for example? How frequently will they pay draws?* What steps does the lender take to vet the builder?**

*The biggest issue I have seen is a lender referred by the builder because they have an easy process on draws. Usually what that means is the builder requests a draw (increasing your loan amount and liabiltiy) and his buddy at the bank pays the draw with no inspection. Maybe that all works out, but often it doesn't. The way these transactions get sideways is a house that's 50% complete and a budget that's 70% drawn out. If the builder requires more than monthly draws ask him why and discuss that with your lender. A builder that can't fund normal operations might not be the right builder for you. Not saying making a second draw in a month's time is an issue but it needs to be known up front that's the plan.

** Just because we do it this way doesn't mean it's the only way. We require information about filings with secretary of state, work in progress, bank references, possibly supplier references, builder's risk and general liability, a NACAM report (essentially a credit report on a home building company).

We're 80% loan to value for loans $2MM and below. LTV decreases above that threshold.

DTI can go as high as 50% with certain stipulations.

Good luck finding the right financing for your situation.