Building a home is a major undertaking. There are many costs and issues that people often overlook during the process. Here are some key ones to be aware of:
Underestimating the Budget: One of the most common mistakes is not accurately estimating the total cost of building the home. You need to start by speaking with a few builders. There are so many costs that you can miss if you are not a builder, design costs, permits, inspections, local government fees and mortgage costs just to mention a few.
Not Researching the Builder: Choosing the wrong builder can lead to delays, cost overruns, and poor quality workmanship. It's crucial to thoroughly research builders before making a decision. If you are getting a loan to build your home the lender will want to vet the builder too. Most lenders will require that the builder have several years experience and a history of building homes like the one you are building. The lender will want references, both homeowners they have built for and business they have worked with. The lender will call these references!
Potential Appraisal Issues: Lenders will do a “Subject to Completion” appraisal prior to letting you close your loan and starting construction. This appraisal will be based on the lot and the plans/specifications of the home you will build. The appraiser will check on what other similar homes have recently sold for in the area. If existing homes have sold for less than what it’s going to cost you to build, you could have an appraisal issue. If you don’t have a big down payment, or lots of land equity, you need to be as close as you can get to the prices of the sale comps. The key here is not to “Over Build” for the area.
Building “Unique” Homes: This another potential appraisal issue. Suppose you want to build a Barndominium, Pole Barn Home, Geodesic Dome Home or some other kind of not so common home? You still have to go through the appraisal process. The appraiser still has to find similar “sale comps”? What happens if there aren’t any? If you have a low down payment (less than 20%), you're more than likely going to be turned down by your lender. If you have a large down payment/land equity, your lender may feel more comfortable with approving your choice of home.
Interest Rates: Locking in an interest rate with a One-Time Close, Construction to Perm Loan is different from locking in a rate on a purchase or refi loan. When a lender locks a rate on one of those loans they typically only have to lock the rate for 30-days, close the loan and they have a completed loan. It’s different with a construction loan. First, construction loans take longer to process and the lender does not have a completed loan until the home is finished and the Certificate of Occupancy is issued. So the lender must lock the rate for up to one-year. Lenders will do that but they need to hedge the lock. They do this by adding about 1% to the rate you would get on a refi loan. The good news is that most lenders will float down your rate to the refi rate once the project is completed at no charge.
By being aware of these common mistakes and issues, you can better navigate the home building process and increase the chances of ending up with a home that meets your expectations and serves you well for years to come. If you would like to know more feel free to call me at 586-917-5534 or visit my website at bestfhaconstructionloan.com. FYI, I also do VA and Conventional construction loans.
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