Construction Loan Nightmare Help

kimmiebFebruary 22, 2009

I am doing a major remodel which is basically building a new house. The banks I have talked to Chase, Hancock (local), and Wells Fargo all want to do a LTC (Loan to Cost) type construction loan instead of the traditional LTV (Loan to Future Value) loan. What this means to me is that they wil require a huge down payment for a Construction loan. They all want 20% of the total project costs up front to do the loan at all. I am in Louisiana, have good credit, high income but, do not have 20% to put down on the construction loan up front. My land/existing house/1st mortgage is $380k, the estimated remodel/construction costs are $400k. If we were doing a LTV loan, I wouldn't have to put any down payment or very little. LTC would mean I would have to put up $140k or so including the $15k I put down to acquire the property. That also means that i would be financing up front $140k of the $400k construction costs which is over 35% of the cost. The bank is really only loaning me $250k. I have to put up $145k and the project won't be complete for 10-12 months. Does anyone have any advice? I have a very reputable architect and contractor so the risk should be low for them. I cannot do a tear down, it would cost me $150k more than the remodel.

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I read your post as, I put 5% down to get a $380K loan for the existing house and land, and now I want a no down payment $400K loan to finish the job. Does that about sum it up?

Those days are over, thankfully.

    Bookmark   February 22, 2009 at 1:52PM
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It's 20% down now unfortunately, although now that the foreclosure "bill" has been announced banks are a little more flexible. I'd applied for an increase on my construction loan to the full 80%. The bank sat on it for 3 mo and only approved it the day after Pres Obama announced the foreclosure bill.

    Bookmark   February 22, 2009 at 2:14PM
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I don't think the stimulus bill is going to change underwriting for new construction loans. In today's world, you have to pay to play. :)


    Bookmark   February 22, 2009 at 5:22PM
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I'm sorry, I was a little short in my above post. I've spent decades as a construction loan officer & workout officer & your post just hit a nerve.

A lender will lend 80% on the LOWER of LTC or LTV.

This is not 'new'. It's a return to standard underwriting. What was abnormal was the easy money of the past 5-7 years. Construction lending is high risk no matter the contractor you've chosen. Also, you're needing a jumbo loan. There is still virtually no secondary market for jumbos. PMI is almost impossible to obtain for jumbos & even more so at higher than an 80% LTV.

I wish you luck but I think you'll need more than $15K skin in the game to get that loan.


    Bookmark   February 22, 2009 at 6:58PM
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I'm sorry I hit a nerve with some of you but, I fully intend to have 20% or more down when we close AFTER construction which is 10-12 months from now. The bank is fine with doing the jumbo then at LTV. Funny isn't it? They want my money now but, they don't want to assume any risk. I have at least 10% to put down now. I just didn't anticipate the requirement to have LTC 20% now! I have owned 3 different new construction homes (that were builder financed) and have been more than willing to put down 20% or more. This is my first adventure in owner financed construction land. I just don't understand why people with great credit can't get a construction loan. The only reason I put only 5% down on the lot or acquisition loan for the house/property was because I knew I was going to turn around and get a construction loan and because I hadn't sold the house I was living in. I am looking for advice not to be categorized with the dead beats that took out loans they couldn't afford. I guess I had a lot of bad timing in the process. Never would I have sold my beautiful 5 year old house that was just a little too cramped if I didn't think I could get a loan. What if I did put 20% into this project up front and the bank goes out of business in the new economy, that could happen. Where would I be? There is more of a chance that some of these smaller banks go under than I do. I'm not taking government hand outs because I made bad business decisions. I am doing just fine. I was hoping for some empathy or advice from those of you that have experience in this area. Are there any other options? There must be other people out there that are as frustrated as I am? Right now I am living in the 1950s ranch with blue bathrooms and with a pile of architectural drawings and bids from contractors that I paid a pretty penny and a tremdendous amount of effort on to get to this point (took 6 months). I have never, ever had a problem getting financing for anything. It sounds like I am stuck for now. Sad isn't it? We have an economic crisis and want to get out of it but, yet the people that are able and willing to spend money to help cannot get a loan? There's a lot of irony in this situation. I can't sell and walk away now, just finished the tennis court in the back yard and don't want to lose that investment. ARRRRGH....

    Bookmark   February 22, 2009 at 11:27PM
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kimmieg - feel your pain and please don't take it out on the wonderful people on this board.

I'm in a similar boat in that I have great credit, job, asssets, down payment, etc but am having difficulties in the loan department. I could write a book on the pain and fustration that me and my builder have endured since September. For example, think draw request made on 5 Dec and funds received on 16 Jan.

Yes, it's an unfair pain...but doesn't compare to those who have lost their jobs, etc. Perspective.

    Bookmark   February 23, 2009 at 12:51AM
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When did this forun become so preachy?! I have always hated it when someone minimizes life events/stressors of others with the statement that it doesn't compare to what someone else is going through. It's right up there with "this to shall pass."

Anyway, to the OP, your situation is similar to how we set up our construction loan a few years ago. We put zero money down upfront (we had greater than 20% equity from the beginning though because our house - even just on paper- appraised for much more than the contract sum.)and paid down the loan at conversion. We did have to qualify for the entire loan amount though because the bank had no guarantee that we would pay down the loan eventually. From conversations that we have had with the bank as we approached mod, it appears that would not be an option now . They are now using the contract sum as the actual appraisal so any equity in the home from the bank's perspective will be solely based on what you bring to the table...and it will most likely have to be upfront. Construction lending is much riskier to a bank than a conventional loan...they don't want to risk THEIR cash until there is something there that is sellable if there are problems (defaults).

Anyway, consider yourself lucky if you can do a loan with just 20%. I have heard that construction loans are now looking for 25% down in many cases. Good luck...researching/shopping for financing was as time consuming as working on our specs!

    Bookmark   February 23, 2009 at 8:27AM
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One option would have been to put the money you spent on doing a tennis court into the actual home's infrastructure. Bathrooms necessities always come before leisure luxuries on the priority list.

    Bookmark   February 23, 2009 at 9:46AM
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"They want my money now but, they don't want to assume any risk."

No, the lender is assuming all of the risk inherent with any construction loan. And, of all types of construction loans, an owner build is the riskiest. So, they are saying, "Great, you have lots of confidence in yourself. So, you put your money in first & then we'll kick in the rest." Why does that surprise you?

Construction loan risk to lender:

1.) You fail to complete the project in a timely manner under the terms of your Construction Loan Agreement;
2.) Change orders resulting in a blown budget & not enough funds remaining in the loan to complete the project;
3.) Potential for borrower to lose source of income during construction loan period;
4.) Divorce (quite common with owner builds);
5.) Failure of the borrower to sell their existing house & can't come up with funds to convert;
6.) Future secondary market risks after completion;
7.) Rate risk
8.) Availability of PMI;
9.) Appraisal risk

If your bank tanks another institution will take over your bank's assets (your construction loan is a bank asset). Life will continue relatively unchanged, for you. You'll just work with different people and, possibly, not even that.

I can tell you that if you came to me requesting a residential construction loan with the attitude you're displaying here I wouldn't even take your application. Afterall, if YOU don't want to INVEST in yourself...why in Heaven's name should I obligate the bank to invest in you?!

Decades of construction loans has taught me that, without fail, a borrower being first in, last out results in a much greater chance of success. It's the same thing as if you wanted to purchase a raw site & build...the lender wants the site F&C going in. The days of 100% financing (especially for construction loans) are over...period, thank goodness. Lenders are back to the "5 Cs of Lending"...capacity, character, capital, collateral, & Conditions. You'll have to meet each one of those to get your loan.

Can you sell your existing house, rent cheaply during construction, & use the equity to front the remodel?


    Bookmark   February 23, 2009 at 10:19AM
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Check with some more banks. I finally closed my construction loan last September with Key Bank. It took 3 months and 9 applications to find a place that was willing to do it. It is a one time close loan, which means that the permanent financing is approved at the same time as the construction loan and it is based on LTV not LTC. I think those are the easier road to take right now. The lenders are rightfully worried about declining values in the time it takes to build, and if your permanent financing is already in place, it makes the construction loan a much lower risk.

    Bookmark   February 23, 2009 at 10:27AM
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Triciae if you'd read my post properly I stated foreclosure bill not stimulus bill.

    Bookmark   February 23, 2009 at 11:39AM
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Sorry, I 'thought' the homeowner assistance was part of the overall Stimulus package?


    Bookmark   February 23, 2009 at 12:29PM
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KimmieB, where do you live in Louisiana? Have you tried Fidelity, a locally owned New Orleans bank? I currently have a construction loan with them for a house that was in deplorable condition. I think I put down 10% of the total cost (house plus renovation), but the total amount of my loan is a fraction of what you need (maybe that's irrelevant). I would visit one of their loan officers in person and fill out an application.

An aside: hasn't it always been harder to get a construction loan for a house AFTER you've purchased it?

    Bookmark   February 24, 2009 at 11:06AM
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Thank you all for your input. The advice and information I have gotten on this board has been invaluable. I appreciate those who have a little empathy with my situation. The whole process has been frustrating from the architect who wasted 4 months drawing a plan that ended up being 4X my budget to the financing issues now. I can see this is not going to be a fast or easy process. Lesson learned. I value and appreciate those of you who are trying to help!

I am in Baton Rouge. Sounds like I just need to keep shopping around for someone that will do the LTV and that I can put down 10% cash instead of 20%. Since this process has taken so long one of the banks came back today and said that because I have owned the house for 6 months now, they will count the current value or equity that was already there when I purchased which was about $70k (we bought below market value). I will also check with the banks you guys suggested. So keep your fingers crossed for me, this may work out after all. I can then move on to getting advice about the actual project!

Thank you so much!

PS in reference to the tennis court, my husband teaches tennis for a living and having our own court instead of him working at a club will increase his take home income. The reason we bought a house in need of remodel was because of the lot being big enough to do this. It is not a luxury. Just wanted to let you know I'm not being irresponsible with this spend. In hindsight, I would have financed it and used the money for the down payment on the construction loan but, again I had no idea we were going to have an economic crisis that changed all the rules!

Thanks again. If anyone else has any other feedback that helps me move this process along, I would appreciate it.

    Bookmark   February 24, 2009 at 10:09PM
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I have a stupid question for someone about to apply for a Const. Loan, like Monday!!! If they require 20% for CL, does that mean I need another 20% at end, to convert to conventional loan?

    Bookmark   February 28, 2009 at 8:25PM
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mgh9393 - no just 20% up front when you do the first close is what I am being told. Good luck on everything!

    Bookmark   March 2, 2009 at 9:59PM
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I thought loan to cost was the traditional standard for construction loans.

    Bookmark   March 7, 2009 at 2:26PM
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After reading all these posts, there is a relatively easy answer. OP states high income, capacity to pay & 10% down. Why not wait until 20% is saved before plowing ahead with the project. While excitement seems to be driving this project and the urgency to complete it sooner rather than later, how about slowing things down a little?

    Bookmark   March 7, 2009 at 3:14PM
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They can't Slow down in the Louisiana area.. because if you do you will be back in Tornado/Hurricane season again. When one of those hits the price of the Building Materials in the AFTERMATH usually shoots up 10-20% at the local retailers for materials.
I know the feeling about the loans... I used a credit union & got a Home Equity loan for my build at 6.75 % because they don't issue Construction Loans. It was a Owner Build house with Architect Assistance from my uncle who is Licensed in Virginia.
The house turned out great & now I am getting a Refi for a 4.5% 15 year Note to pay off the loan & pay off my CC for items necessary to the build but not counted during the construction.
Trust me..whatever your budget is ADD 20%-25% to the Cost!You will not get the same discounts that the Builder's gets. The Inspectors will cite all kinds of arcane CODE stipulations that MUST be fixed BEFORE you can proceed to the next step. Plus some of these contractors have 1 price for YOU to do your job (generally MORE) then what they will charge builder Bob to do the job. Your only building one house; builder Bob may be building 10, 20 or more...
Now with my appraisal I did go up in Value but because rates
in my area have depressed its not as worth as much as the "actual Cash" we have put into this project!
However this is a 'permanent investment' for us (and possibly our parents) ; we thought about this home long and hard & plan on being here the rest of our lives. This is not a 'flipper' for us..

In the end we did get enough Value to exceed the equivalent of a 35% DP on our Final Appraised value once the improvements were made. But we told our Credit Union about the Cash reserves we had to make the loan work from the beginning..and we put off doing certain things like putting the Steam room/ Steam door in.A Tiled Shower will get you past your final inspection. All Paint & Trim work was done after the final inspection too. We learned a lot about building from this experience and we got a lot of sweat equity from doing things ourselves!

    Bookmark   March 8, 2009 at 6:07PM
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We were actually in the same situation. Most banks/credit unions would loan the lower of cost to build or appraised value. We ended up going with Pinnacle as they went with the higher of the two. I think there is a Pinnacle in LA. Good luck!

    Bookmark   March 10, 2009 at 9:06PM
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kimmieb - I feel your pain and how. I have been working on a construction loan since November. I have changed brokers, been denied, had a lender close down (while my file was in underwriting already) and most recently have been waiting on a clear to close for 30 days. We are sitting at 88% LTV and they are asking for another 10% down. I wouldn't have a problem with that had it not been for the fact I spent half of that 10% paying off credit card dept because if I don't have 20% "skin in the game" then I have to qualify in order to pay PMI. If I kept my money and paid it towards the 20% down I wouldn't need to pay either way you people like us are gonna pay to play. Lets not mention the cost of all the appraisals, surveys, plans, credit rescores, lot cost etc.......we are already in this deal in the thousands not to mention being emotionally tied to it. All my broker can tell me is that he is working on it. Every week is another something. Underwriting just takes forever now and I am left hanging in the balance waiting for an answer. It is very frustrating.

    Bookmark   March 13, 2009 at 3:57PM
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Hey everyone, don't ask me how I found this (though glad I did), but I think it's a sign as I need answers to questions involving a best friend going through a situation concerning his construction loan, divorcing and while house is finished, it was a double close (have no clue why) and the original lender went under, was bought out by another; they know of the divorce while under construction - which was final in November; but there's no way on God's green earth (no pun intended on this forum) they are going to roll into a primary to him now and I'm wondering what his options will be. He did put a substantial amount of money into it on his own, additionally (not sure how that works when the loan is in default). He was told by his lawyer during divorce to stop working on the house, but now it is finished and, not being able to (what we are assuming the lender will tell him) obtain a primary loan, he's wanting to put it up for sale (rural area outside of Houston with 12 acres, barn w/living quarters, equipment shed, top notch fencing, etc.) to obtain what he's put into it, and have the loan paid off. He obviously won't be able to afford it. He has every receipt of what he's put in over and above, but I guess my question(s) are for Tricia, having the experience and knowledge, as to what you've experienced during the process, with those who have gone through a divorce. It's sad and frustrating at the same time - I feel so badly for this person. It was a dream - as with all of our homes.

Tricia, I swear I'll send you a Starbucks gift card - your advice is spot on!

    Bookmark   April 1, 2009 at 4:04PM
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