I need some advice from all you great folks about home loans.

LucyinMNAugust 6, 2014

So excited I found this website, and look forward to hearing from everyone! My husband and I have recently paid off both of our cars, college tuition, and have been renting together ever since we both graduated from college. So because of all the monthly expenses we haven't been able to save up all that much money. But, we have been approved for a $250,000 mortgage. There's just one problem though, after the countless houses we've looked at we haven't found a single one we love. So here's my question for you garden webers. We've called around and got guestimates from various contractors around here and have discovered we would be able to build a house in the $250,000 range. So would we ever be approved for a new construction loan if we didn't have any money for a down payment? Would we look silly for bringing it up to our loan officer? Any and all advice is appreciated! Thank you!!

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Depends on the builder you choose. If you go with a builder who is developing a subdivision and choose one of his plans, and he finances the build, then you could possibly *maybe* be able to just buy the house at the end with a traditional loan.

For a construction loan, you will need to bring money to the table. The bank will not want to assume 100% of the risk. The typical arrangement is that you must have about 20-30% cash that goes toward the project before the construction financing kicks in. Plus closing costs. So you would typically need anywhere from 50K to 75K at a minimum to get started on a custom home build.

    Bookmark   August 6, 2014 at 2:54PM
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Oh my goodness I didn't think you needed to bring that much money to the table, bummer! Well we live in a town of 8,000 people so unfortunately there wont be a builder developing a subdivision any time soon. I just was assuming since we're approved for a $250,000 loan, and the cost to build a custom home here is right around the $250,000 mark, we wouldn't need to bring money to the table. Thanks so much for the reply and help!

    Bookmark   August 6, 2014 at 3:20PM
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Just keep looking for a home. Look down (in price) at something that you could remodel with extra funds over time, perhaps. But, in general, building will cost more than buying. And, that is why a bank won't loan 100% of the funds to build. Rarely will a newly built house appraise for the cost to build.

Also, rarely will a heavily remodeled home cost less than a newly built home. So when I say look down in price, don't look for something that has to be completely redone and added on to for what you want. But, a bathroom, kitchen, or wall removal okay.

    Bookmark   August 6, 2014 at 3:20PM
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Kirkhall- thanks so much for the response and the help! If we did go the renovation route, would it be possible to take out extra $$$ from the lender to take on some of the renos? Or do lenders tend to stay clear of that too?? We've been blessed with low prices in our area but the housing market is slim pickins.

    Bookmark   August 6, 2014 at 3:33PM
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Lucy, my Mom listed her house in a small town in MN (even smaller than yours), so I've been looking at the RE listings in her area. I know exactly what you mean about slim pickings! Mom listed at $165K, and there are hardly any listings near that price. There are old/tiny houses for less than $100K, and there are lake properties for $300K+.

I suggest you do one of two things: either keep renting, and save as much as you can (dump your car and student loan amounts into savings), or change your expectations. You might not find your dream house in your community right away, but can you find a house you could live with for 5 years?

Another possibility is to buy property, but wait to build. If the property is paid for, it counts as equity when you go to build.

    Bookmark   August 6, 2014 at 3:58PM
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Thanks for the response Annkh! Good advice, as of now we plan on renting til a house comes along or a pile of money! There are a couple lots for sale in our area that are very cheap with electric and rural water for only 13K. If the land is that cheap how does the equity aspect of it all work? Would we need to come up with more money for a down payment too? Thanks so much for the help and so sorry for all the questions guys! Just trying to grasp all of this so I know what to expect when sitting in front of our lender.

    Bookmark   August 6, 2014 at 4:09PM
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You usually cannot get a loan for improvements/remodeling unless and until you have equity in the home. A bank is not going to want to loan more money in total than the house is worth. If you buy a house at 100k, that is how much it is worth; not 100k plus 15k (for remodeling).

I suggest the same as Ann... Keep saving and work up money for down payment on either a home purchase or build. And, if a home purchase, maybe keep some money out of the purchase if you have projects you know you'll want to do right away.

    Bookmark   August 6, 2014 at 5:01PM
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You should ask your lender about a FHA one time close construction loan. I dont really know all that much about them but it only requires a 3.5% down payment and 620 credit score if your debt to income ratio is reasonable. Does anyone know anything else about these??? Seem like there would be a catch with them.

    Bookmark   August 6, 2014 at 5:12PM
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If you were to buy and existing home, were you planning on having no down payment? I thought it was pretty difficult to do that now.

    Bookmark   August 6, 2014 at 6:45PM
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I don't think you would look silly bringing it up to your loan officer. It never hurts to ask, especially if it's a small hometown bank. Just so you don't feel so bummed, we are building our home with no money down. It's not the way we wanted to do things but sometimes that's just how it goes. It can be done although probably not the ideal way to go.

The only thing I know about FHA loans is that there is a limit on the amount you can borrow and it varies by location and other factors. In my area the amount is pretty low.

    Bookmark   August 7, 2014 at 11:03AM
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I would call up a couple different loan officers and get their input. Here in Michigan, there is multiple credit unions offering as low a 10% down on a construction loan. If 10% is something you can swing might be worth a shot? My guess is you might have to deal with PMI in this instance however.

    Bookmark   August 7, 2014 at 12:47PM
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I think that without signficant savings, you are no where near ready to be a homeowner, even if there are programs that would assist you with it. It's a matter of dicipline in your budget, and you need to develop those habits that will make you successful as a homeowner, not one who ends up losing their home.

    Bookmark   August 7, 2014 at 1:41PM
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