Critical Thinking. It's the characteristic which
defines us as human beings. It's the same characteristic which is vital to the
ultimate creative challenge: the design/build process for residential construction.
Building a custom home means creating a home style which
matches your life style. You want a home to reflect your character, your values,
your environment. A home as original as you are.
Critical thinking about a construction loan begins before you
even visit a lending institution. To get the best possible deal you have to
know how to choose the right
What are your rights? One resource to discover how the lending
system works is the Federal Reserve Board. Under the
heading ``Consumer Information'' their home mortgage article begins with this
``Shop for the mortgage package that best meets your financial needs. If you
apply for a mortgage and the lender says you don't qualify, keep in mind that
some lenders have stricter credit standards than others. Try someone else. Don't
stop shopping after one discouraging experience - or even several.''
Where can you get good advice? As part of the decision making process,
speak with an attorney, certified public accountant, or realtor not associated
with a lending institution. Be careful before you act on any expert's advice! A
good professional can help you save time, money, and headaches, but you have too
much at stake to trust an expert to do your homework
One good source for up-to-date information is HSH Associates. HSH Associates is the world's
leading publisher of mortgage and consumer loan information. They don't make loans
-- they report on the terms offered by lenders across the country. However, you'll
also benefit from their ``Library '' and ``Author's Corner'' as well as links
to other sources of information.
What will home building cost? Start
by guesstimating these costs:
- + Buildable
- + Home Design
- + Construction
- + Cost of Financing
TOTAL COST TO BUILD YOUR CUSTOM HOME
These costs taken in combination will determine the amount you may need to
borrow. For example, in regards to a buildable site, you not only must consider
the asking price for the lot, but you must also consider the total expenditures
to develop the site in order to build. Each site is unique requiring different
expenditures so this specific dollar amount will vary from site location to site
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Keep in mind that this
aggregate guesstimate is only a ``working'' figure. There are many variables to
consider which can affect the total cost, but you've got to at least create a
beginning point from which to proceed. Match the dollar amount for which you are
pre-qualified with your best estimate of the total cost to build your home on
the site you choose.
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Are you pre-qualified? Before you even begin
to search for a buildable site or a home design, find out how much you're qualified
to borrow from a lender. Consider this an important inaugural lesson about the
entire home design/build process. Completing a residential loan application at
your local lending institution will force you to assemble all the necessary documents.
Finding out how much you can borrow in order to build will vary according
to issues such as your credit record, down payment issues, the type of loan you
choose, and existing market conditions. As an initial step, this prequalification effort
will help you better understand what you can afford.
that getting prequalified is NOT the same as completing a loan application. Not
only is prequalification FREE, but getting prequalified is very informal and the
lender should be able to let you know approximately how much you'll be able to
borrow very quickly.
In this way you'll know immediately if you can even
afford to proceed with the project you have in mind! If you qualify to borrow
the amount of money in your guesstimate to do your remodel or new home construction
project, then you can confidently move forward with the more formal, time-consuming
effort of making a loan application with your lender.
What forms will
be provided by the lender? Typically, a lender will provide you with a variety
of forms (although this may differ from lender to lender):
- an ``application checklist'' form,
- a ``residential loan application''
- a ``description of materials'' form,
- and a ``construction cost breakdown''
Pay VERY CLOSE attention to the application checklist and residential
loan application. Keep the description of materials and construction cost breakdown
for later reference.
At first the residential loan application and your
personal financial statement will need to be completed but don't actually submit
these forms because your still in the information gathering mode. Since you're
just shopping for the best deal possible and not yet making a final choice, don't
get bogged down with further details such as a complete
set of working drawings, a description of materials, a construction cost breakdown,
or details of lot acquisition.
What information will be required from
you? As you shop around to different
lenders, you'll find their requirements may vary slightly, but the following
information is usually required from you:
address and phone number, length of time you've worked there, and your current
position and monthly income; OR
- (if self-employed) profit and loss statements,
tax returns and balance sheets for the past two years, as well as the current
- Your personal asset and liability backup information, including account
numbers, balances, and addresses and phone numbers of your financial institutions.
- Details of lot acquisition such as deed or a copy of the earnest money agreement.
Also, you must provide notification of any covenants which apply such as approval
by an architectural review committee.
- Full documentation for your home building
If this seems like a lot of information to track down, don't worry. A loan officer
will be glad to help you every step of the way. Why? The lender wants your money;
they need you as much as you need them.
Remember: You'll be shopping for
the construction loan which best meets your financial needs. Your first application
won't be your last application; so, once you've accumulated this required information,
the process will be less arduous each time you shop a lender.
next? Critical Thinking. It's both an art
and a science. Take advantage of your intellectual capacity to weigh and consider
- Know your consumer rights.
- Get good
- Understand total cost to build.
- Pre-qualify for the
amount you can borrow.
- Create valid and reliable documentation.
The ``description of materials'' and ``construction cost breakdown'' forms
will come in handy later when you eventually consider a suitable home design.
These forms aren't necessary to pre-qualify for a loan.
forms early in the conceptual phase of the home design process so you can assess
your cost structure and plan your specifications at the outset of design development.
These forms will be added to you loan application once you've made a final choice
of which lender is best for you.
An advantage to using
these forms early in the home design process is to remain within the application
format required by the bank.
You'll find it very efficient to be in
conformance with the application documents right from the beginning of the design/build
process so you won't experience any inconvenience translating FROM how the architect/designer
organizes the description of materials and construction cost breakdown TO how
the lender requires you to present the very same information to them on their
Another advantage to using these forms is to know
from Day One of the design process that the cost to create your home style is
what you can afford to build.
Whether you work with a general contractor
or act as an owner/builder, you'll want assurances from the architect/designer
that the materials specified and scope of work
described in the conceptual drawings is consistent with your pre-qualified budget
amount. Why aggrandize a design solution which you cannot afford?
the lender's required loan application documents will cause you to do a line item
cost analysis for each phase of the design/build process and account for all the
money to be spent so you can be assured all expenditures will be covered by the
loan amount. Be sure the residential designer/architect does a cost analysis from
the get go.
Most important: Don't tolerate "attitude". You're
doing someone a favor when you allow them to make money by doing business with
you. If you experience a loan officer with an "attitude" which denotes arrogance
or a know-it-all demeanor, it's time to politely excuse yourself from the situation.
This is your money. You're the BOSS. Critical Thinking is the key!