self-financing build while bank loan processes?

thisishishouseJanuary 30, 2014

We've got our plans and builder lined up, now are lining up the financing. We've learned that the bank will need 45-60 days to process everything before they're ready to fund things. We'd really rather not have our build held up for 2 months due to paper pushing.

We're in a position to be able to put up some money to get the project rolling. Maybe 5-10% of the build cost. We figured that could get the builder doing site prep, maybe get the foundation work done, well and/or septic. Whatever he could get done in the 2 months it takes the bank to get things together, we could/would fund.

Anyone ever done anything like this? Does putting our money in up front make things easier or does it complicate things with the bank? Is this inadvisable or disallowed?

We've done so much so far and hate the idea of stalling for 2 months.

Anyone here done a combo of self- and bank financing on a project?

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jhernan

That's a great question and would love to see the comments. I plan on doing the same thing on my build.

    Bookmark   January 30, 2014 at 8:53PM
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ellenandco

Our bank and the title company said we could do anything we wanted up to the foundation form boards going up. Check with your lender and title company.

    Bookmark   January 30, 2014 at 9:00PM
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kirkhall

Double check that having that money not in your account at the signing of your bank loan won't affect your eligibility for your loan (your assets change when you spend your money...)

    Bookmark   January 30, 2014 at 9:08PM
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MFatt16

I did it. Just be sure to really well document everything. If we wanted to be reimbursed, we paid for the foundation and dirtwork while waiting, then it had to be well documented showing where the money came from, where it went, and what it was for.

    Bookmark   January 30, 2014 at 9:09PM
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mlweaving_Marji

We obtained our construction loan through Merrill Lynch wealth management Co., so essentially we're borrowing our own $, yet they were adamant that nothing be done and no construction materials be on site before we closed on the loan.
Bottom line, check w your lender as to what their policies are.

    Bookmark   January 30, 2014 at 9:16PM
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MFatt16

Yes, I actually got in writing that it was ok because I had heard horror stories.

    Bookmark   January 30, 2014 at 9:57PM
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housebuilder14

Also - what will you do if you don't get the loan?

    Bookmark   January 31, 2014 at 10:33AM
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joyce_6333

We put more than 20% down on our build, and paid out of pocket until that amount was reached. Only then did we start drawing on the construction loan. Our builder and the bank were all on board with this. We saved all the receipts and presented them to the bank so they could document that as our down payment.

    Bookmark   January 31, 2014 at 10:36AM
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live_wire_oak

If you don't own the land, there's no way I'd spend a dime doing anything to it. If you own the land, capital improvements to the land are improvements that are needed regardless of if this particular bank approves you for the loan or not. But, as mentioned above, spending money changes your financial picture for loan qualification.

    Bookmark   January 31, 2014 at 10:50AM
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housebuilder14

I am not sure what live_wire_ oak is saying (or if she is even referring to my post). My point about the loan is that even if you own the land but need the financing to build the house, I wouldn't start building until you are approved for the amount that will get the house done. What happens if you start building and can't get the loan? What happens if you start building based on plans and the bank comes back with a low ball appraisal and therefore will only loan you 80% of what you asked for? If you can't finish and have to sell the property what you have started presumably won't be a capital improvement worth anything (or very little) to another buyer. If you want to change your plans at that point (b/c of lower loan dollars from bank) it might also be difficult.

    Bookmark   January 31, 2014 at 12:01PM
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live_wire_oak

I was speaking of things like tree clearing, driveway building, well digging, etc. Things that increase the value of the lot, even if it ultimately cannot be built on due to the financing issue. An improved lot is a more valuable lot.

However, if this is a build on builder owned property, all of that is moot.

    Bookmark   January 31, 2014 at 3:24PM
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thisishishouse

Thanks for all the replies so far. To answer some of the questions above:

We don't own the land, yet. We've got a P&S on it, with conditions of all the build elements lining up properly. We've got the cash to buy the land and don't need the bank for that.

After getting the builder's estimates, we've got about 10-15% of that in cash to contribute. Just need the bank for the rest. We wouldn't be looking to get reimbursed for anything we put it up front.

All told with the land and the % we're putting down, I think the initial estimate showed a 58% LTV. The bank already gave a "pre-approval", for whatever that's worth.

I am concerned with the possibility of the bank not coming thru with the financing after we've invested & started, but I'm told it's unlikely. With us putting in 40+%, the bank appraisal would have to be majorly off before it dropped below 80%LTV levels.

Our particular loan officer is just unclear on whether or not the builder can work during their app process time. It'd suck if they can't and we'd have to take our business elsewhere.

    Bookmark   January 31, 2014 at 5:00PM
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ellenandco

Not to be a Debbie Downer, and I say this not knowing anything about where you are or the market where you are, but we paid cash for our land 18months ago and watched the value evaporate to nothing when the appraisal came back. We had been planning the land value as our 20%, but had to use cash instead. That's what we used for our dirt work, and what we're still using now in the foundation phase. Bank $ will kick in during this phase, too. In other words, don't get ahead of yourself. It's exciting and fun, but sometimes slowing down isn't a bad thing.

    Bookmark   January 31, 2014 at 8:01PM
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MFatt16

It can take a long time to close too so keep that in mind. We were about 50% loan to value and they ran us through the ringer big time. Nothing could speed it up it seemed and the pre-approval was quite different than the loan we ended up with. Not necessarily worse or anything but they can change their minds about things and it gets harder after you start.

    Bookmark   February 1, 2014 at 12:57AM
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Hoosierbred

All I can say is document document document. Our land was paid for prior to applying for construction loan. Then we drilled for a well. We said we would pay for it out of our own money. We had not received an invoice by the time we closed on construction loan. Then we built a pole barn on our property which we paid out of our own money. We had excavation done on our house to get all the dirt we needed to level the land for the pole barn pad. We planned to pay for that ourselves, too. We had not received the invoice for that service prior to closing either.

In addition to those items, we had already purchased all our door hardware, lighting fixtures, and appliances. And, my DH was making our laundry and kitchen cabinets. I'm telling you we had to have a receipt and proof that everything was paid for for each of the items we purchased. We didn't need all of it to count toward our 20% as we had more than enough from our land and pole barn. And, we were bringing another $50K cash down at closing. We had a set amount that we wanted to take out on a mortgage. And we were doing a one-time construction to mortgage closing. Our bank said because of all the restrictions with HUD we were required to provide them with all documentation. I had it all but the loan approval took forever. And, we ended up having to bring to closing the $ of the two invoices we had not received yet - well and excavation. The bank said they had to control that those would be paid. So, it was our money, but we had to give to bank to put in escrow to pay those bills.

It was a very frustrating, humbling and long time until the closing. We felt we were on trial throughout the process. We have excellent credit. We eventually had to step back and not take it personal even though it it such a personal financial matter. We did finally have to just have them take off the custom cabinets that DH is making. They are valued between $30-50K. But the bank would only give us appraisal credit of material cost only. We said forget it. Didn't need that hassle. Our appraisal came in fine for what we needed it to be to close the loan. If we choose to refinance later after the house is complete, I would hope it would appraise higher seeing all the custom finishes. We've actually had a wonderful experience with the bank with our monthly draws or reimbursements since the closing.

It's all very tricky. Like others have said, check the bank first before starting everything. Things change from year to year and from one financial institution to another.

Good Luck!

    Bookmark   February 1, 2014 at 6:24AM
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Sophie Wheeler

Why would you do anything at all on land you don't own? I would have thought that your bank would have at least wanted that as a prerequisite for building in the first place. Builds where the builder owns the property are generally financed by the builder for construction, not the bank. And the buyer just gets a mortgage, not a construction loan plus a mortgage. Why aren't you going that route and buying the land? You have much more control over the process that way. You are at the mercy of both the builder and the bank this way.

    Bookmark   February 1, 2014 at 11:00AM
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MFatt16

I agree, buying the land was the only way for us to make it all work. The description of being on trial is quite accurate and again, keep all your documentation handy, even stuff you think the bank wouldn't want to see. Days before closing our bank wanted to see docs from the sale of our previous house, over a year prior, to show how we paid for the land 12 months before we applied for the loan.

    Bookmark   February 1, 2014 at 11:29AM
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thisishishouse

Holly, MFatt: The land is being sold by a third party, not the builder. The P&S is conditional on all the build elements coming together.

It's a strange process. To buy the land, we need to be able to afford the house we want on it. (there's covenants stipulating the size/type of house that can be built. We couldn't build small then expand, for instance.) To know the cost of the build, we need a builders quote. But first the builder needs plans. Have to design plans with an architect. Pay the architect, submit to builder(s), recuperate from sticker shock, go back to architect and redesign, get another quote. When that's settled, need the bank to spend a couple months studying the documents from the architect and builder.

Sigh. If I just had an extra half million dollars or so lying around, this could be much easier. Story of my life... ;)

Anyway, our plan is (or was, depending on whether the bank allows it) is to file the loan application, and in parallel to it processing for us to close on the land, then pay out of pocket for the site work and foundation. Hopefully we can find someone at the bank who doesn't think this is an unusual occurrence.

    Bookmark   February 1, 2014 at 1:59PM
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Tom9951

I have found this discussion interesting. We are very close to starting our build. We too are waiting on the final close from the bank. When I brought up the idea of getting work started with our own funds prior to close, I was told we could not do that. Apparently if work has started then it is no longer "new" construction, and that changes the terms of the loan, and would cost us more money. We own the lot outright, but if work has begun it falls into a different category. Unless I get really screwed on the appraisal we should be turning dirt in the next week or 2.

    Bookmark   February 1, 2014 at 4:31PM
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MFatt16

My land wasn't owned by the builder. The "strange" process you describe is exactly how we had to go about things. It required quite a bit of money up front, not that much but definitely some to get the land ready, architect plans, and builder bids. I also ended up putting up money before closing on the land to run a thorough feasibility.

    Bookmark   February 1, 2014 at 9:13PM
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Sophie Wheeler

''If I just had an extra half million dollars or so lying around, this could be much easier. ''

Yeah, well, on a build that sounds as tight and as dependent on the bank for ''creativity'' as this sounds, you better make sure you have a 15% contingency fund in addition to the money down you have to kick in. It's never very much fun to be the poor cousin sitting at the dinner table watching which fork all the rest pick up next. Real estate people will always tell you that it's a good investmnt to be the smallest and plainest home in an area of larger and nicer homes. From an ''investment'' standpoint, that's a correct view. From a family living standpoint, not so much. Especially if it's already a stretch just to be there. The home price itself is usually the least of the ongoing higher costs of living in a more expensive neighborhood. Keeping up with the Smiths and Joneses can wear you down, and especially the kids.

    Bookmark   February 2, 2014 at 9:26AM
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Hoosierbred

I agree with hollysprings about having that contingency fund. Don't cut yourself short. We did all our product selections prior to bidding out everything so we could get apples to apples estimates. Even though we have stuck with most of our choices, we have still had to pay a lot out of pocket for those things that just come up. Plus, we ended up upgrading some items along the way. And, there are usually other things that are out of your control - like mold removal in the crawl space. How could you predict that?

    Bookmark   February 2, 2014 at 10:36AM
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MFatt16

Ditto Hoosier, we did all the "right" legwork and have stuck with choices so far but there is always unknown. We also had the bank require extra money over what they said in the beginning. We ended up leaving a set amount in an account that we never touched to appease the bank. I borrowed it from family. I can afford my build, but the bank wants me to have a big cushion to cover the unknown.

    Bookmark   February 2, 2014 at 11:38AM
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thisishishouse

Just wanted to follow-up that our bank gave us the go-ahead on this. Our loan officer had to send it up to the underwriting manager for clarification/approval.

UW says that the loan will still be made for the full amount, and that (with cancelled checks and deposit statements) they'd show what we pay the builder as earnest money deposit reduced from the funds to close. They also needed us to document in the builder contract that the first couple line items in the draw schedule would be paid for by us.

    Bookmark   February 21, 2014 at 9:26AM
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MFatt16

Good deal. Can't wait to see your progress :)

    Bookmark   February 21, 2014 at 10:59AM
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Thewitchdoctor

This is interesting. Our loan was approved but it's not complete until appraisal guy comes out and does his thing. We have already dug basement and basement walls are up. They want to pour basement tomorrow and do plumbing rough in. The appraiser won't even be here until day after tomorrow! Glad to know we aren't the only ones that did things out of order. That being said, I would never recommend starting the building process without your loan secured. We have a unique situation plus we have the money to cover at least 25-30% of building costs but it still makes me nervous.

    Bookmark   February 25, 2014 at 4:32PM
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