Anyone having trouble falling asleep at night? I present this blog post on finances just for you and the fix to your sleep problems! Just be sure to come back and read it again in the morning if you’re considering building a house, because it does contain a good two or three helpful tips you’ll want to pack with you on your financial journey. Let’s get right to it shall we?
1. Have your finances in order
What I mean by this is take a look at your current financial picture with your lender glasses on. I’m not talking about those fashionable glasses you bought for looks and casually wear atop your head when not in use; I’m talking about the professor reading glasses neatly stored in their case on your bookshelf. This is serious business y’all. For us this phase meant…
- Securing the positive equity from the home we sold
- Showing a dependable savings
- Making significant payments on our (okay my) credit cards
- Gathering documentation for proof of work, taxes and insurance
We didn’t even apply for pre-approval until the credit card payments reflected on our credit reports. In our experience, a credit score of 740 seemed to be the magic number for ensuring you’ll get the best deals and rates. If you and your spouse are both signing the mortgage this applies to both of you. If one person has a 740 and the other a 730, they’re going with that 730. By the way, I’m talking about your FICO credit score. Most home lenders will use FICO which is not what is reflected on some of the popular credit check websites. Credit Karma, for example, uses the Vantage 3.0 scoring engine and you will sometimes see differences between this and FICO. We paid a small fee on Experian.com to check our FICO score before applying for approval to confirm what the lender would see when running his report. After you pay the ‘one time fee’ on Experian.com be sure to check your profile to make sure you’re not also signed up for a monthly membership. I got ‘tricked’ into that, but it was very simple to cancel after I noticed the fee on my credit card history the following month. And speaking of credit reports, this is a good time to go ahead and give the whole report a look over to make sure everything is accurate.
2. Shop around for the right lender
Our realtor connected us with the first bank/lender we worked with on our approval for our construction loan. We didn’t have a bad experience and were ready to move forward, but when bringing up this topic with our Schumacher Homes sales consultant, she generously mentioned another bank they work with often and suggested we could land ourselves an even lower interest rate. This story has a happy ending, because she was right and we locked in an amazing rate as quickly as we could. Which in our specific case, was not that quick at all. I’ll explain our story; it’s potentially a bit unique although likely more common than I’m alluding to now.
You already know we’re building on family land. You read my So You Want to Build a House post, didn’t you? 🙂
Well, that land belonged to Allen’s stepdad and his Dad before that. The farm land was originally established in 1951 under a different name and started off with over 300 acres! Today the land remaining with our family is a perfect mix of housing (we’ll be the third house), farming (alternating corn and beans) and woods which now consists of some pretty fun dirt bike trails in addition to the pretty camping areas and creeks thanks to Allen. These fields and woods are a special place; it’s where Allen grew up and spent hours outside with Valentino (man’s best friend) playing fetch and searching for arrow heads and other treasures. When Hailey was little she loved playing near the creek and finding salamanders. That girl adores every animal on earth I think. I’m sad to say we lost Allen’s stepdad last year and telling you that only makes me want to continue rambling in this paragraph to share all the great stories that showcase what a stand up guy he was in this world. More than once he said how much he wanted at least one of his kids to build on the land so I’m overjoyed we’ve put a smile on his face by going this route. And that’s how this ties in to our drawn out process to close our construction loan.
By the time we decided to build, the farm had been placed in a trust and Allen is the Executor. For the two residential lots we wanted to build on we had to work with our family lawyer to go through the legal process of taking those lots out of the trust and putting them under our name. That involves a heaping pile of paperwork along with formal approvals and notarized signatures from each sibling, spouse of sibling and aunt. That was a total of 10 people who had to find the time to go do this task for us in person. We’ll be having a house warming party just for them! The entire process took us a couple months and I have to give a shout out to First Federal Lakewood, because they were beyond helpful and extraordinarily generous with extensions to keep our dream of an interest rate locked down. Remember in my first post where I mention you need patience to build a home? I practiced having patience A LOT during these two months. Bottom line, shop around (this won’t hurt your credit score) and find the lender who has the best product for you and keeps your best interest in mind at all times. A win for you should be a win for them.
Was that the longest explanation you’ve read about getting a great interest rate? For those of you who read every word, y’all are kind people. I’ll reward you with moving on to the next topic!
3. Finalize the details of your new build
Don’t worry, this topic earns its very own post to talk about all the steps and decisions involved with finalizing your build plan, but I wanted to mention it quickly since you do need to have everything determined before you can close your loan. Likely obvious, but I think we’ve all learned not to make assumptions! Once we had our pre-construction meeting where we walked through every little detail of our house and officially signed off on the plan, Schumacher sent the final documentation to our lender so they had all of the numbers needed to draw up our paperwork.
4. Understand the details of your loans
It’s true construction loans require a bigger time and financial commitment than your typical loan for an existing home. Since the bank is investing a significant amount of money into your home that doesn’t even exist yet, the requirements for documentation and down payment can be greater. You’ll most likely have a two step loan like us: a construction loan that will transition into a permanent conventional loan. Some of the key knowledge I gained about our loans is summarized below.
- 20% wasn’t required for the down payment, but we did follow that rule and I highly recommend doing this if it’s an option for you
- During the construction phase we pay interest only on the money that has been drawn. If you have a down payment, the bank will draw from that money first before distributing the lent money in your loan. So in our case, as soon as they begin using money from our loan for things like the drywall money draw, we’ll pay interest on that amount monthly.
- It’s suggested to over pay during this phase where interest payments are the only requirement, because any additional money paid will go towards principle and reduce the loan amount when it converts to a conventional loan. Or you can take advantage of the interest only payment time frame and buy some cute light and window fixtures for the house 🙂
- By default, our lender allows 8 months for the construction to be completed. We decided to keep this default and after 8 months our construction loan will flip to a conventional loan. That means our monthly mortgage payments with principle will actually begin in January.
- You can choose from any of the typical loan lengths for your conventional loan; we went with 30 years for now and will likely look to refinance and shorten that period of time at some point down the road.
My best advice for understanding your product options and the details of the loan setup you decide on is to ask questions! Don’t hesitate and make sure you fully comprehend everything before signing the papers and strolling out the door. And a bit of good news… remember how I told you property taxes were such a buzz kill when we were house hunting? Well, in the case of building you actually won’t start your payments on property taxes until after the first year of being in your house. This sounds like ‘yay extra money to buy furniture!’, but it would be wise to set money aside during that year so when the payment comes around you’ve already budgeted for it and then your tax return can be spent on something fun! 🙂
5. Celebrate the closing of your loan
Most importantly, pop some champagne and cheers to the closing of your loan and the start of the next phase in the process! Keep your patience close by though, because the next phase includes more waiting as you obtain permits for building, zoning and driveway (plus well and septic in our case) and request an address!
I’m taking a quick break from the home building talk to feature these yummy cookies in the next post, but the post after that gets into the fun part of our build planning phase, designing our home!! The task is a bit daunting for those with indecisive minds (right here!) but it can be done and I fell more in love with Pinterest along the way. I’ll explain why in the design post 🙂
Please feel free to comment with any questions you have for me and if you’ve also gone through the construction loan process please share some helpful feedback!! I know there’s plenty more that’s not coming to mind for me at the moment!
Have a beautiful day!