Financing

Our loan went for final approval before the loan committee at our bank yesterday. Things went very well and our loan was approved and stamped. We were very excited.

Initially we thought that we would first have to buy the lot with a lot loan and then refinance that loan later into a construction loan once we had plans and a cost breakdown. The bank decided that it would just be easiest to just do a construction loan now with the lot being our first draw on the loan. This should save us a significant amount of money in loan origination fees. We will go in with our equity injection next week and close on the construction loan at the same time that we are closing on the lot.

Since the bank usually doesn't fund construction loans without a cost breakdown we had to back our way into the numbers. The way we have approached this is that we have a certain amount of cash to inject into the project, so if we consider that amount at 20% of the total value, that tells us how much the total project can cost. We don't want a loan greater than 80% and on new construction a bank generally won't lend more than 80% anyway. This is especially true in the current economic climate. Our loan officer has been great and has really been proactive in getting this approved.

The first step was to get us approved for the permanent financing at the end of construction since it would make little sense to build a house and then not qualify to buy the house you just built. An extra challenge for us is that we own the condo we are currently in and we had to qualify for the final loan with our current mortgage payments part of the debt to income ratio. Otherwise we would have had to scramble to either sell or lease our condo before they would close on our permanent financing. Not knowing how the housing market will be 10 months from now, it could have been pretty stress inducing. So, this made it pretty tight on our debt to income ratio, but we did ultimately get qualified. Our condo will most likely be for sale though as we near completion of the house.

Once we were qualified for the permanent we were able to start working on the construction financing. Again, we don't have plans or a cost breakdown yet, but knowing what we are qualified for on the permanent financing lets us back into a number that defines our budget. This number will be our guide as we move towards designing the home. We are okay with this because we have talked with contractors and architects who think our budget is doable, even if it will be tight. With smart planning and a bit of sweat equity we should be able to pull it off.

These charts show roughly how the money is allocated in the budget:

Overall Construction Budget:


Breakdown of Soft Costs:


One thing that helped our loan sail through approval is the neighborhood we will be in. It is close to some really great neighborhoods that have high home values and the initial appraisal showed that we should not have any problems getting a good value on the home for the permanent financing.

So, anyway we have financing in place and we are excited to get moving on the design process.