Construction Loans and Remodeling Loans

Latest Developments in Construction Lending

2007-09-19T13:30:00.000-07:00

Construction Loans, just like purchase money and refinance loans are now almost constantly in the news. Latest developments include Countywide’s announcement today that they are pulling out of the construction loan market.

In the recent past companies like National City and Mid County closed their doors on construction loans and some others annunciated very restrictive guidelines an example of which is SunTrust’s announcement yesterday that they will limit their construction loans to a maximum of 70% LTV for all their construction loan programs including fully documented loans.

Unlike purchase money and refinance mortgage loans that are based on present value, construction loans are based on future value and since the so much uncertainty surrounds the future values of real estate, investors prefer to stay away from what only a year ago they considered a very lucrative market.

In general there are very few institutions that still do construction loans, which is proving to be very challenging for the average borrower. We are constantly receiving calls from prospective borrowers who would like to build a new home or substantially remodel their existing home, but almost every one of them is not qualified under the present guidelines.

What's Nwe in Construction Loans?

2007-09-17T16:35:00.000-07:00

For a while back there, it seemed like there was nothing to report on in the world of construction loans, and then all of a sudden hell broke loose!

Construction loan lenders just like all mortgage lenders found themselves in a world of hurt, caused mostly by their own relaxed underwriting guidelines and manipulation of guidelines that encouraged fraud.

Encouraged fraud? You ask, perplexed and confused… Yes indeed, now every CEO of every major lender, who got onto the band wagon and concentrated on closing numbers only and kept manipulating guidelines to facilitate fraud, is looking for an excuse to cover his/her tracks. Everyone is to blame but themselves.

Things have settled somewhat now and I’ll start posting on a more regular basis from now to keep construction loan borrowers informed of the changes that are here and those that are on their way.

Meanwhile, I should mention that our main website, www.constructionloancenter.com is undergoing major changes that will enhance its presence and functionality. I’ll keep you posted.

Don’t Move Up, Get a Construction Loan and Remodel.

2006-07-26T16:24:00.000-07:00

Despite the slow down in real estate transactions, it seems that construction loan applications are continuing at a fair pace, though lower in numbers compared with last year.

It seams to me that demand for construction loans will start to improve as people will realize that moving up may be difficult but a major remodel will be a lot cheaper.

With the massive increase in real estate values the real estate taxes have become very large, and while purchasing a new home pegs the buyer at the purchase price for real estate tax purposes in a remodel only case, taxes are typically increased based on the cost of the increased square footage.

For sake of argument let’s take the example of a 1200 square foot California property that was purchased 2 years ago for $350,000 and is now worth $450,000. The tax base is still set at $350,000 and if this homeowner wanted to sell and move up to a 2000 SF property worth $750,000 the new tax rate will be based on that. Assuming a 1.15% average tax rate the new payment will the monthly equivalent of $718.75 which is an increase of $383.33.

If that same homeowner were to do a complete remodel and add 800 SF at a cost of 150,000 then the equity in the house will be increased by some $150,000 or so and the taxes will be increased by about the monthly equivalent of $143.75.

The above calculations are very rough and the prospective borrower should check out the details with their county, but the fact remains that if the overall area will support the new construction’s value then the gain in equity and the real estate tax savings can be substantial.

What’s more is the fact that a construction loan can include the mortgage payments during construction, which will make it possible to temporarily move out of the property.

Purchase Money Construction Loans

2006-01-24T13:21:00.000-08:00

Most construction loans have guidelines that require a full construction permit before they will close the loan.

This presents a challenge when it comes to combining the purchase of a property with a construction loan, forcing borrowers to either negotiate a long escrow period which in this market is a practical impossibility, or to close the transaction with a purchase money loan and then refinance into a construction loan.

None of the above options are particularly desirable. In the former you the borrower ends up negotiating for ever and in the latter closing costs add up.

We now offer a construction loan that not only offers a high 95% loan to cost, but will close the transaction before the final permits are issued. However the fact remains that a construction loans clock starts running from the day the loan is funded. Therefore you must choose your construction period carefully so as not to exceed the time period.

Going over the time period in a construction loan can result in payments of penalties that could add up to a substantial amount.

New Guidelines Make Old Program Unbeatable

2005-10-11T14:22:00.000-07:00

Construction loans are based on the independent ratios; Loan to Cost and Loan to Value, and very often it is the loan to value that gets in the way limits the loan amount that can be made on a particular project.

Some programs limit the LTC to the same range as it is for the LTV of a given loan amount, and yet others will allow a margin of 5 to 10% over and above the LTV for the given loan amount range.One of our investors has recently come revised it’s guidelines and will now make construction loans for up to 95% loan to cost ratio within the entire range of loan to values for the given loan amounts.This new and unusual development will make it possible to obtain a construction loan with much smaller down payments.

Not to be out done an other investor introduced a program the is completely independent of loan to cost unless if the transaction is a combined, purchase and construction loan, in which case the loan to cost is an in significant 5% of the cost of the lot!

The combination of these two powerful construction loans brings the possibility of building your own home a lot closer to home!

Home Equity Line of Credit - HELOC

2005-08-28T22:31:00.000-07:00

The combination of construction loans and home equity line of credit (HELOC) will very often make a construction project possible in one the following scenarios. If you own a property now, and are buying a lot to build a home from ground up or buying an existing property with the intension of doing a major remodel you can use a home equity line of credit to on your home to get started.

Since most construction loans include an interest reserve account, the payments on the HELOC do not get in the way of qualifying for the new construction loan.

Read More >

Stated Income Construction Loans

2005-08-28T22:28:00.000-07:00

Stated income loans are available for construction loans just as they for purchase money and/or refinancing. Depending on the program used they typically require the borrower to prove the availability of cash reserves but not income.

The only documentation requirement for the stated income is normally a letter from the borrower's CPA or Tax Preparer, simply stating the fact

Read More >

Fed Fund Rate Increase and Construction Loans

2005-08-12T10:20:00.000-07:00

The recent increase of fed fund rates did not have a significant impact on construction loan rates or regular mortgage rates for that matter.
Why? Because this was an increase that was very much anticipated by the market and priced into it.
In other word this rate hike was already priced into the mortgage loan rates for some two weeks.
In fact there was a small rise early in the week for a day or so due to the fact that some trades anticipated a larger than what has become usual increase of 0.5%, which of course did not materialize.

Construction Loans differ from regular purchase money or refinance

2005-08-09T13:00:00.000-07:00

Construction Loans differ from regular purchase money or refinance home mortgages in the way the loan amount is calculated and the way it is structured.
The main components of a construction loans are:

1- Soft costs; consisting of architectural plans, engineering and permit fees.
2- Hard costs; which are all the actual physical costs of construction.
3- Closing costs; consisting of origination and lender fees, title, and closing fees.
4- Inspection feed.
5- Reserves; consisting of interest reserve and contingency reserve.
6- Existing lot pay off

Regular purchase money or refinance mortgages are based on Loan to Value Ratio (LTV). Where as, construction loans are based on LTV as well as Loan to Cost Ratio.What makes the whole thing more complex is the fact that the way these numbers are calculated or the way the numbers are put together differ from one investor to the next.In fact the calculations get complex enough that most loan officers in most lending institutions don’t even know how to calculate a loan amount. This is what results in last minute unpleasant surprises.The problem most applicants of construction loans face is when at the 11th hour they get a call informing them of the final loan amount as calculated by an underwriter which may or may not be sufficient to meet the borrower’s needs.

At http://www.ConstructionLoanCenter.com we specialize in construction loans. Our familiarity with the guidelines of construction loans offered by most major institutions makes it possible for us to choose the construction loan program that best suits you and your project.

Since we are approved brokers with all these investors, the cost of the loan to you is either the same or sometimes even better than applying directly.

Construction loans are a specialized field and as such we assign you an expert consultant from the moment you apply. He /She will work with you from the very beginning until the funding day, making the process smooth and seamless.

For more Detailed Frequently Asked Question about construction loans, please visit http://www.constructionloansfaq.com

Stated Income and Documented Income Construction Loans

2005-07-27T07:27:00.000-07:00

Wrap The Purchase and Construction Into One Loan and Save on Closing Costs

>Loans Up to $3,000,000.
>Can not Document Income, Stated Income Programs are Available.
>Stated Income Program will not make sense, then use a No Income Qualifier Program.
>Up to 95% LTV and 95% LTC construction Loans to fit your special circumstances.
>Lock Your Your Permanent Mortgage Loan's Rate Now, for Maximum Peace of mind.
>No Prepayment Penalty Loan Programs.
>Ground Up Construction or Modular Homes, Whichever you choose to do.

Expert Advice, Prompt Service and Killer Rates
Construction Loans at www.ConstructionLoanCenter.com

Support For My Mortgage Calculator Site

2005-07-19T10:35:00.000-07:00

How about a plug for me latest blog which is suppose to support my mortgage calculator site.
I nearly forgot about that. Yes I know that I am now sending too many links out but since this page is now a PR5, may be it will only support the real estate mortgage calculator site. In which case I can turn around and use the pages of the mortgage calculator blog to supply PR to the inside pages of the Real Estate Directory on that site.
It goes without saying that construction loans also need mortgage calculators and if don't remember to add the phrase construction loans to these blogs then I'll be running the risk of loosing the relevance of the pages.
Boy this is fun...
I will be posting more information on the actual process of construction loans soon though.

New post for July

2005-07-19T10:00:00.000-07:00

This blog has kind of evolved into a combination of information on construction loans as well as my experience with the two other websites that own and operate, namely mortgage calculators and construction loans faq.

Very soon I’ll probably be covering my first baby steps for the latest venture; Home Builder’s web which right now is nothing more than a registered name and an empty shell of a directory.

Right now I am working on building back links to the mortgage calculator site by concentrating on the terms “Mortgage Payment Calculator”, “Interest Only Mortgage Calculator” and last but not least the most standard term “Mortgage Calculator”.

Of course it goes without saying that I am not neglecting the two most important construction loans sites. In fact we will be building around 25 new links to the main construction loans site and starting to submit the FAQ site to some 100 directories.

30 year fixed rates at their lowest.

2005-06-30T10:34:00.000-07:00

30 year fixed rate home mortgage rates sank to their lowest level in over a year, despite the certainty of a rate hike in the overnight rates by the feds.

This is defiantly good news to those who are desperately trying to buy into the American dream and are faced with soaring real estate values.

Freddie Mac, in its weekly survey, reported that for the week ending June 30, rates on 30-year, fixed rate mortgages, for conforming loan amounts dropped to 5.53%, down from 5.57% last week. This week's rate was the lowest since early April 2004, when rates on 30-year mortgages averaged 5.52%, a spokeswoman for the mortgage giant said.

Jumbo loan amounts command a slightly higher rate and you should expect to pay additional rate/fees for specific additional features such as stated income, lower than prime credit scores etc… Most construction loans fall into this category.

According to the same survey, rates on 15-year, fixed-rate mortgages, a popular choice for refinancing a home mortgage, also declined this week to a level not seen in over a year, to 5.12%, compared with 5.16% last week.

Construction loans are normally based on 3/1 ARM or 5/1ARM mortgages which are also at their lowest level in over a year.

Real Estate Directory

2005-06-26T23:17:00.000-07:00

Been working hard setting up the first thirteen state specific pages for the new real estate broker and agent directory within the mortgage calculators and rates website.The plan is to get the state specific pages seasoned long enough to get some PR so that I can the turn around and exchange links with other real estate sites.The long-term effect is going to be lots of links to my construction loans site through three way link exchange schemas with other construction loans related sites.

Mortgage Payment Calculator

2005-06-25T11:39:00.000-07:00

I have recently created a mortgage payment calculator short list that is a webpage in my mortgage calculator site that lists the most important calculators that you may need.

Construction loans time line

2005-06-25T11:17:00.000-07:00

Building your dream home begins with the hunt for the lot that suits your needs. Though most people are very well aware of this fact they are at a loss as to what the next step is.Here we bring you a simple article that covers all the major milestones in the entire process. If you already own the lot or you are actually working on a major remodel of your existing house, simply skip the first part.

Construction loans are only given a final approval once the construction permit is issued. The following milestones are critical in getting the process right and closing the transaction smoothly. Assuming that you are looking for a lot or an older, smaller or run down property to renovate, the first thing to do is establish the basic parameters of what it is you are going to build. For this you start by a simple research project, studying what is available in the neighborhood that you would like to build. Your real estate agent is the one who can be of tremendous help in this. He/she can obtain sales and listing data for the area that will assist you in your research. With a full consideration of what it is that you can actually afford, establish a basic home size, type and price range, which should fall somewhere in the mid range of the average house in the area. There isn’t much point in being one of the smaller houses of the area and there most certainly is no point in being the best. You must always aim at the average size in order to maximize the return on your investment.

Armed with this information, you are now in a position to start looking for an architect or off the shelf hose plans, as well as contractors. Ask around and ask around all the time. Ask the architect, talk to people who have recently built a house, and interview as many people as you possibly can. The combination of this research is going to provide you with a wealth of information and turn you into an informed consumer.When discussing the construction project with all these professional ask for estimates of your permit fees and taxes or better still visit your local building and safety department and ask.You now have a pretty good idea of how much the whole project will cost and how much the finished home will be worth. It is time to start talking to construction lenders. This is a specialized field, interview a few construction lenders. Don’t be fooled into believing that every loan officer is experienced in this field. The details are much more involved and much more complex than purchase money or refinance loan.How do you know if he is experienced? Ask for a full construction loan budget and ask how the process works. At the first sign of hesitation, thank him/her and move on.

Milestone 1: Lot is chosen and you have entered into contract.Complete the construction loan application.At this stage you can complete the construction loan application despite the fact that you can not supply detailed information on the construction project or the contractor. The lender can open the file and start work on what’s known as the credit package, meaning everything to do with you, your credit and employment.

Milestone 2: Basic Architectural Plans Are Ready.
You have already chosen a contractor or two and have asked for bids. Now your construction lender can get a set of plans (working drawings are not needed at this stage.) and a basic line item cost breakdown from your contractor which will enable them to order a construction loan, future value appraisal report.

Milestone 3: Appraisal and contractor packages are ready.While the appraiser was doing his/her thing your detail working plans were getting ready, engineering was getting done and the contractor is working on detail cost breakdown, materials list and builder’s credit application.

Milestone 4: Construction Loan Package is submitted to underwriting.
Appraisal report and builder’s package are ready and submitted to the construction lender who has by now everything to submit the loan for a final approval to underwriting. Note that you are still not done with process as you have no construction permits yet.

Milestone 5: Plans are submitted to the City/County for Plan Check.
In most cases this stage happens concurrently with stage 4 or even a little sooner. Depending on your local authorities this part can take anywhere from a couple of weeks to 3 months or more. Also the plans may be returned for some adjustments if they are found to violate a local code or something that was missed by the architect or the engineer.

Milestone 6: Permits are issued and submitted to the construction lender.Guidelines for some construction loans will require the permits to be issued while others may accept the plan check receipt (proof that plan have been submitted and the fees paid) to issue a final loan approval and issue the closing documents.

And viola! You are done with the first and most important phase of your construction loan process. Now you are ready to start the real challenge of building your dream home.

Where Was I

2005-01-28T01:26:00.000-08:00

I have't posted here in some time now. Why? Well for one thing I was busy closing construction loans, for another, just like I said in my first post, It's kind of lonly here...
Thigs got very complex as I started working on the lunch of my new Mortgage Calculator site, and that's not to mention that the main Construction Loan Center site is undergoing a major redesign, the first it is about to get since it's lunch in late 1999.
Why a Mortgage calculator site? Well at the end of the day, we are mortgage brokers and creating a mortgage calculator site is a natural extension of things. The idea being that we will eventually end with a group of some 6 to 12 quality mortgage sites.
Now that things have stablized a bit I'll try and get back to the basics and start construction loans related posts here...
raz
Just a quick note here as an edit:
I need a link to the new real esate broker and agent directory page to boost it's ranking a bit.

My Greatest Concern Is...

2004-11-24T15:19:00.000-08:00

"I have a growing interest in building my own home. My greatest concern is one of carrying cost during the construction process. Could you elaborate on possible pit falls and safety measures to protect one self during the construction process?"

In most construction loans the investor will let you have an initial draw of around 10% of the costs in the first stage of the draw so as to facilitate the start up. Some of them will even allow a 10% draw against "contingency reserve".

In some cases this advance may be deducted from the first draw.

There are a lot of construction loans which have been designed in the east cost. The draw schedules of these plans very rarely conform with the reality of life in places where most custom homes are being built on hillsides. In California for instance the costs involved in grading through foundation can be as high as 35% of total construction costs. Which is something that an east coast underwriter finds very difficult to understand.

It's a no frills simple web site in a question and Answer form that explains the entire process.

Now, since this post has kind of aged, and interest only mortgage loans have meanwhile become very popular I thought I'll use it to help my other site.

Interest only mortgage loans have always been around but with recent increase in real estate prices they have become more popular.

It is however important to be aware of interest only mortgage loan's shortcomings.

Hello astrygin

2004-09-17T16:27:00.000-07:00

Wow… The first comment that I am responding to.

What’s more, a comment from someone close to home… I actually live in the LA are (Chatsworth). Small world huh?

The costs involved vary depending on the soil conditions and severity of the slope involved. Retaining walls can get very expensive.

There is no way that you are going to develop a strong enough sense of which site is better than the other. Therefore you will need to go about getting your project off the ground in the following sequence:

First; go and drive by the available sites, simply to form some kind of a sense of what the asking prices are.
Seconded; talk to a couple of local architects, builders and engineers. Get an idea of average pre square foot prices to build.
Third; re-visit sites for sale.
Fourth; ask for a due diligence period in escrow (to check on feasibility) and then open escrow.

The four steps outlined above will very often run concurrently. The key is not to leave any of them out or else you will paint yourself into a corner. And an expensive corner that can be!

With all due respect to all real estate agents out there, please remember that they simply don’t have enough information about the subject to be helpful. Of course there are exceptions.

The discipline of doing things right

2004-08-28T14:06:00.000-07:00

The discipline of doing things right

First posting in a while… Construction loans can sometimes be horrendously difficult to close. Having recently experienced a particularly difficult case reminded me of this blog and the stage I left it at.
In my last post I covered the basic definition of soft cost of construction, and would now like to emphasize the importance of recorded keeping. The borrower referred to in the first paragraph neglected this very essential. What made everything worse was the fact that he had done it over a two year period.
With real estate price stabilization we could not appraise the property for more than we had and the equity that was gained through spending could not be established. Receipts for the architect and engineer were not available the guy had retired and moved on and cancelled checks were not available.
The money was substantial and the construction project well behind schedule. We eventually closed the loan, but what a difficult project.
www.constructionloansfaq.com

And now its time to give my mortgage rate news blog a plug...
Read the latest on mortgage rates and new mortgage products in a bi weekly update of home mortgage and mortgage calculator information blog.

It’s Lonely Here

2004-06-09T13:06:00.000-07:00

Right now I am talking to myself as I know for a fact that I have no audience. As soon as I have posted a few articles I will be able to submit to various directories and hopefully get listed so that those who are getting involved in a construction project can benefit.

I will start by posting basic information on all stages of a construction from choosing a lot to the final stage of obtaining a construction loan. As readers post questions I will address those as well as start posting more expanded and detailed information on all aspects of the process.

I’ll leave this post short and move on to a more informative post on obtaining a construction loan.

Raz

The soft side of things?

2004-06-07T21:34:00.000-07:00

Since I left my last blog with a statement that sounds more like a Sears ad, I felt compelled not to wait till morning to explain what I meant. Which will also be an opportunity to cover a construction loan’s basic terminology early in these postings so that we can move on with the important stuff.

Every construction project starts with a series of actions, which are happening on paper, namely; architectural design or purchase of plans off the shelf, engineering of the design, survey, permits, utility connection fees, school fees and a whole host of other fees only limited by the imagination of your local authority. All of these costs are classified as soft costs or pre construction costs as oppose to the hard cost of construction or the actual cost of construction, which begins with digging!

Any time that you are not sure if a cost is “soft” or “hard” just remember the analogy; paper is soft where as dirt, concrete and wood are hard.

The main reason for separating the two is the fact that every construction loan’s guideline will require you to obtain building permit before funding or closing the loan. That means you will be out of pocket before you can actually borrow but the lender will still need to know by how much for two distinct reasons:

1- To calculate total cost so as to be able to calculate loan to cost ration. More on that late.
2- To calculate reimbursement, should the loan to cost and the loan to value allow. And more on that later.

I will follow this post by an other one, in which I will explain how I am going to try and maintain this blog and how I will try and make it as useful as possible for our readers.

My First Post

2004-06-07T15:45:00.000-07:00

After searching the web for a blog to cover would be home builder's conserves and/or questions on the subjects directly related to home construction, construction loans, architects/home plans, contractors and builders I decided to create this blog as I found no site that was of any use.

I will post short articles, experiences and guidance on the subject drawing on my years of experience on the subject. An experience gained as a professional loan officer closing construction loans and overseeing the activities of four other loan officers. The cumulative effect of that is a vast knowledge base that I can draw on to guide people.

This site is not about technicalities of construction project in the sense of how do I build a swimming pool or a retaining wall, but rather how do I finance a project, should I use an architect or an off the shelf plan, what’s the difference between a modular home or manufactured home… In other words, “the soft side of construction”.

This is a good opportunity to add a plug for my interest only mortgage site, as it really needs some help.

How else would I concentrate some back link value to my interest only mortgage positioning efforts?

After all interest only mortgages are used for home purchase as well as refinance and home equity lines of credit.

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