When building a new house, most people require a Home Construction Mortgage or a New Construction Loan.
But this can be a catch 22 scenario, because we ran into problems with the rulings on some of these loans.
To begin with, there are rules to follow: They sound easy enough on paper, but when put into practice, it can be difficult, especially if you are acting as your own general contractor, or Owner Built home.
We had some experience in the construction industry, and we wanted to act as our own general contractor. Right away, our bank was concerned. They asked why we didn't just hire a local well known general contractor, and she rhymed off some names.
They seemed more willing to actually over extend your new construction loan, with extra padding for "unforeseen circumstances" if you hired a general contractor without question. When we had explained that we were doing this ourselves, suddenly the amount of money we were asking for was looked at and picked apart. She then proceeded to let us know, that of the very few couples who built their own houses, most separated, or gave up and hired someone to finish it, and that concerns them, if they have mortgage money invested in a unfinished home.
I just looked at her, and said, we want to build a nice house, and in order to afford this nice house, we are going to build it ourselves. I explained that we would be hiring local companies and smaller trades to help us with the building.
They finally agreed when we jumped through all their hoops. We had already sold our house, and were setting up an RV on site to live in. With the cheaper accommodations, and being on site, they felt we were 100% committed, so they agreed. (they did look at us like we were nuts though!)
This is when the rules for a new construction loan become hard to follow.
New Home Construction Mortgage Rules for Owner Built
1. They break the money advances into "draws". The first draw will be given to you once the frame of the house is up and the roof is on. Now in my books, that is a pretty substantial part of the building done. If we had that kind of money to do that, why would we need their new home construction mortgage?
Their answer to that, was to hire trades that would wait 60 to 90 days to be paid. This pretty well cuts out all the small local trades. This means that the bank is in effect promoting the large and in charge companies out of town, which we did not want to use.
2. Next draw is when all the windows are in, and all rough in for plumbing, wiring, heating etc and floor coverings. Once again we ran into trouble with this 60 - 90 day thing, because we got the best deals from local electricians, plumbers and floor covering installers, if we could either pay on the spot, or pay within 10 days. There is no way that these stages of the house were going to be completed in those 10 days. But we played a little of "rob peter and pay paul" since we were living in a RV on site, we had a bit more of our paychecks available.
But I got creative too, with credit cards. Very carefully, I applied for those no interest for one year cards. I got two of them, and still determined to use local trades, I managed to pay them on time, with no interest costs to us. But this can be very stressful, and I was applying for these cards from my cell phone in the RV.
3. The last draw was for everything to be done, right down to the shiny door knobs, trim, might as well be food in the fridge.. We passed their test. They sent one of their inspectors here for each stage, and he went over the place very carefully. What I did notice is that on another building site down the road, he was not as picky, because it was a well known general contractor in the area and I guess were not worried, so a bit of a dig at the homeowner built home.
4. The last rule, for getting our new home construction mortgage, was that they would hold back 10% to us. They want to make sure there are no trades with liens against the house. Normally this is done for 60 days, but because we did this house ourselves, and used local trades, they decided this should be 90 days. This really hurt, because that was a substantial amount of money.
Each one of these draws has to go through a lawyer, when you do your own construction. They do a search each time. So my question to them, which of course ruffled a few feathers, was if the lawyer did a search on the very last draw and there were no liens.. why did we have to wait the 90 days to get that last little bit of money? We were already living in this house with a occupancy permit and everything.
I got a muffled answer, about it being the rules.
Basically at the end of the day, big banks have a tendency, in my opinion to support big contractors. I am sure she was right, that some couples just can't do this, but I can see why, if they give you that hard a time throughout the whole process. As a small builder of your own castle, you have to jump through more hoops.
But in the end, we supported and gave lots of work to those small trades that can't afford to wait the 60 -90 days to get paid (How many companies can do that anyways?) and we got good work and decent pricing because of it. Our house cost a lot less than had we hired a general contractor from a big local builder. I have nothing against a good general contractor or builder, but we could not afford the house we wanted if we h
Once your home is built, then they will change your new Home Construction Mortgage to a conventional mortgage.
Most new construction loans, are "interest only" in the beginning, then are changed to a proper mortgage or line of credit once the house is complete.
I am all for hiring local trades, especially the small guys. So, if you are embarking on building your own castle and are not rich enough to completely finance it yourself, just be prepared to jump through some hoops at the bank.
Do your homework, so you can have a answer for all of their questions. They are scared by "homeowner built homes" as they call them, because you don't answer all their questions.
Have Everything You Need With You When You Apply for a Construction Mortgage
1. Make sure when you make your appointment, that you mention you are applying for a "Home Construction Mortgage" or a Home Construction Loan" instead of just saying you are applying for a mortgage, because this will be a different person.
2. Make sure you have your house plans, approximately how much it will costs (get some local take offs of prices and material list from your supplier)
3. Make sure you have a permit from your local township office approving the building.
4. Give proof of your income, and your living expenses, and how you are going to pay for things.
5. Have an amount in mind. The more money you have of course the better, but make sure to add at least 10% to the amount you feel you need to allow for expenses and extras, and their holdback.
6. Make sure you understand their system of "home construction mortgage draws" and don't let them talk you into more money if you hire a contractor, unless that is the route you prefer to go.
7. They are a bit scared of homeowner built homes, but if you have all your ducks lined up, and you can make them feel confident that you can do this, you are more likely to get your new construction loan.
But be ready financially, to be able to pay for some of your trades in between draws, either like we did with creative financing of zero percent interest credit cards (that you make sure and pay off before the due date) or family loans. This can save you a ton of money. We found a great plumber etc, through word of mouth. Trades that had been in this area for a very long time. Mostly Father and son operations. They passed all inspections by our town, and were happy to give us a good price, because they did not have the overhead. We were able to afford a nice house because of the savings.
A Home Construction Mortgage or a New Construction Loan (however your bank labels them) does not have to be a scary venture. Just look confident, do your homework, and you will be fine and get approved. We did!