Construction Loan Ordeal

Well, it's been a while since we have done any work out at the property but I have been crazy busy working on the financials.

Since we are doing an owner-builder (OB) build, it severely limits our options for obtaining constructions loans (CL).  Several months ago, I pretty much called every bank around ) so I thought and while many do give CLs, most don't allow OB ... meaning we have to hire a general contractor.  Since we are going to be doing a lot of the work to save money, we don't want to have to hire a GC and pay the 15-20% fee.  Well, there is one local bank that is OB friendly and have been talking with them over the past three months to work out the details. 

They only lend 80% but the cool thing is that they give credit for sweat equity.  So, we only have to pay 5% out of pocket cash and then 15% can either be cash or labor equivalent - so cool!  From the initial budget I started back in Jan, it has grown significantly ($$$) as I get more refined on the numbers.  Currently the house is definitely above the amount we wanted to borrow and is on the very upper end of what I wanted to pay monthly ... but can squeak it out knowing (hoping) that our current house nets us about $25k extra after the sell.

The original plan was to submit for permit mid-late Feb and it would take about 6 weeks to get through the process.  Then I would submit for CL and be able to break ground mid May with framing starting early Jun.  Well, that plan is blown.  The final construction docs and engineering took longer than they thought so I  knew I my timelines would be getting crunched.

Three weeks ago, I went in to meet with the bank to see about having the permit and CL process run in parallel.  Our credit reports came back over 800, we only have one monthly payment, all the construction docs looked great so we were ready to pull the trigger .... but the bank changed their CL package slightly.  Due to the size of the loan, the permanent conversion (and interest only calcs during the construction phase) is 5% at 25 years and I estimated my budget on a 4% / 30 yr.  They will give the money but my monthly would be hundreds more, not good.

I started scrambling and found two other small local banks (about 40m away) from searching other people's build blogs.  Called them and thought I had a much better solution.  They use internal appraisers (1/2 price), rate is set at beginning with one closing costs - currently 4.25% / 30yr, and lend only at 80%.  I downloaded the application, get all the paperwork required, and am really excited.  That didn't last long though :-)  I asked them about the 20% that I have to pony up and they require me to put that much in cash into an account during the entire build.  That means they don't give credit for sweat equity and when we are going to be doing electrical, plumbing, flooring, .... that is alot of money. 

Trying to be creative, I asked if I put up the cash and at the end, I had cash left over, can I get it back.  In essence, that would mean they would be giving credit for sweat equity without officially allowing it.  The bank manager said I could make a pitch to the underwriter and have a really good case give our current financial state (almost no debt, credit rating, etc).  Well, the only way I could get enough cash is tap into my 403 account (which is something you never want to do).  I was only willing to go this route if I would get the cash back and I could put back into the 403 account.  Turns out I can pull the money out and while it qualifies (for house purchase), I'm still penalized by the government.  They used to allow a 'loan' with minimal penalty if paid back in 2 years but no longer allow.

Now, I'm back to original bank and will go through their CL process.  However, at the end I will have to go with another bank to get a lower rate BUT means another set of closing costs.  This really bites but unless you have lots of liquid assets sitting around, kinda limited. 

During these past few weeks, the bank recommended that I get the initial appraisal first before submitting for permits.  Again, another setback on my timelines.  The market is still recovering so appraisals for custom homes have been hit and miss; especially when they are out in the 'boonies' and no real comps in the area.  I'm waiting on an appraisal and don't expect it completed until next week.  If it comes in high enough then I can submit for permit asap but if it doesn't, then I'm really not sure what we're going to do.  I can either walk away, pay the difference, or I can make a pitch to the underwriter for a second appraisal (not typical).

Hopefully it will work out and then I will have to decide - submit permit for normal 6 week process or pay $100/hr for expedited service (except they wont say how many hours would be needed).