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In the begining...

Posted by Esmen (My Page) on
Tue, Aug 21, 12 at 16:36

Hello everyone! I have been listening to this forum for a bit and am writing this in hopes of receiving a little wisdom and direction to start me out.
Our situation: We are (fingers crossed) putting our home on the market in three weeks. We will most likely not net any profit from the sale. We will be moving into an in-law's available house for nominal rent (probably $500 per month). We will then begin saving (about $2,500/mo) and working toward building a home on property that we own in a suburban area east of Seattle, WA. We are looking at house plans in the 2,500 sq ft range in what I suppose you'd call "moderate" scale � not the cheapest build, but not so much that we are above our means. So now begins my journey of it all - and yes, I'm almost too paralyzed to begin! Would anyone be willing to share advice or experience in any regard to things like - How much should we have saved in the bank before beginning (a percentage of estimated costs?) Did you pay out of pocket for things like plans, design fees, ect before taking out the loan or did you do it all in one fell swoop? Our credit union does not offer construction loans, one bank offered an 80% construction loan. Does this factor in the value of the property or does this mean that if our house will cost $300,000 to build we need to have $60,000 as a down payment? I had hoped for a year of research and saving but maybe that is totally unrealistic. I know I have a lot of research and legwork in front of me and I've ordered some material that I hope will get me started. If these questions are putting the cart before the horse, I'll understand. I just dread walking into an unknown bank with no idea what I'm in for. Maybe I'm looking for some hope that we can actually do this and will gladly accept any advice or insight. I would also love any recommendations for books or resources that people found useful.
Details: We are a family of 5, with one in college and a 16yr old and 11 yr old still at home. We are thinking about building vs buying an existing home because the property is directly next to grandparents and family and is already owned.
Thank you for any thoughts!


Follow-Up Postings:

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RE: In the begining...

Our situation was a little different, because my dad is our architect. He is retired, but still has the program on his computer, so I don't have to pay designer fees, etc. We went to our bank to talk financing. They are having us do an 80% construction loan, which will then be refi'd into a 30 year fixed upon completion. I found it helpful to just sit down with a couple banks and have them walk us through their process. Good luck to you!


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RE: In the begining...

The property is owned as in you do not have a loan on it? If you even had a loan on it, when was it paid off? These are things the bank is going to want to know.


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RE: In the begining...

First, there are a couple considerations, 1. do you own the land outright? And 2. is the value of the home once it is built going to me more than your cost to build?

Q. Did you pay out of pocket for things like plans, design fees, ect before taking out the loan or did you do it all in one fell swoop?

Yes. Personally we paid for design fees, engineering and we will be paying for permits and costs to the electrical utility all upfront. All of these costs were much higher than we anticipated, so start finding out what it will cost in your area now. Start shopping around now for a floor plan, if you can find one online and just get it modified great, if not start working with a designer as soon as you can afford it. You may also need things such as topographic map, drainage plan or other engineering requirements as required by your city/county. Start looking into what is needed in your area now.

Q. One bank offered an 80% construction loan. Does this factor in the value of the property or does this mean that if our house will cost $300,000 to build we need to have $60,000 as a down payment?

This goes back to what the home is worth once it is built. If for example your home will cost $400,000 to build, and it will be valued at $500,000 most banks will consider that $100,000 in equity (being the land you own) as being part of your downpayment. This will greatly affect how much you need to have saved.

Three banks to talk to: US Bank, Wells Fargo and Umpqua Bank.


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RE: In the begining...

Let me run back over that last one again as I'm not sure my example was clear.

If it will cost $300,000 to build, and the appraised value of your completed home is $360,000, AND the bank is willing to lend 80% LTV (Loan to Value) you would not need a downpayment at all. You would just need to cover closing costs and all your upfront costs.

That said, the reverse is true as well, if it will cost $300,000 but it is appraised at $280,000 then you will need to find that extra $20,000 as part of your downpayment.


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RE: In the begining...

Hello neighbor! We are near Seattle too.

Here is our situation: bought land with cash for 135K. Hope to build a smaller house where we will be doing the some of the work- hoping to a construction loan of 300-325K (don't know the final numbers yet). Subtracted out of that $300,000 will have to be washington state sales taxes and closings costs, so take that into consideration.

Our land was luckily "build ready". It has water, power, cable to the site. It also has a driveway and the septic was already designed.

Out of pocket so far has been design fees (1% of square footage), septic resubmission ($1350) - if you have to do the actual design as well that is more I think 2K or so) and we will also have to get our building permit which will be about $4,000 before we start. We can reimburse ourselves for those costs with the construction loan, but again, that is less that can go towards the actual "building" of the house.

So if you own your land outright, you should be able to use the value of your land as a downpayment.

In this area, BECU does construction loans as well as Washington Federal and Timberland bank.


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RE: In the begining...

I am quite familiar with your area. :) They are about to build 18 2500 sq foot houses on the 3.5 acres right behind my house in a close in suburb east of Seattle... Your house should appraise fine. You will need to do homework on your builder.

You are in a golden position being able to rent for $500/mo in this area. Go you!

I think most people have the design and land prep stuff all sorted out and paid for before they get the loan.

All 3 of the banks Laura listed are in WA. Also check a couple additional credit unions... I don't know which one you tried.

Finally, lots of people like to suggest Farm Credit. They are in Washington, though I don't know if they do your type of loan or not in Washington. When my brother built his house (in 2010), they found that although Farm Credit held the farm asset loans and knew very well the status of the finances, they were too strict on their paperwork for him to actually get the loan since he didn't have a steady income with a regular paycheck (not the way a farmer's finances work). Of course, this was at the height of the bank-mortgage fiascos; and it is unlikely you have a farmer's income... They might be an option for you.


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RE: In the begining...

As a Dave Ramsey devotee, I suggest having no less than 6 months living expenses in the bank and being debt free before looking into building. This is in addition to having as much cash as possible on hand to pay for materials/subs between draws. For example, we poured our concrete footers yesterday at a cost of around $7000. We paid COD which saved us around $1000 but we couldn't get an advance on the construction loan because they only release draws after the work is completed and inspected by the bank officer. To save money, I wrote a personal check and will submit the receipts to the bank for reimbursement.

We also paid out of pocket for plans, permits, insurance & builders risk policies, as well as the demo for our old house. Our loan manager said we could submit those receipts for reimbursement as well but we had a decent cushion set aside for the build and would rather pay those costs up front instead of financing them for the next 15 - 30 years. :)

Our construction loan maximum amount is 80% of the proposed appraisal including the land, which we owned outright. The bank made it very clear that we can borrow no more that that number and will have to pay out of pocket to complete the house if we run out of money. We actually borrowed less than the maximum because we wanted to avoid any issues with the final appraisal. That's why we're also paying cash for several line items instead of rolling it into the const. loan. $1,000 here and there adds up *very* quickly.


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RE: In the begining...

Oh my! Having all your debts paid off first! If I went with that idea I wouldn't start building until interest rates go back up to 6%.

I think the key is to have all bad debt paid off, some debt is actually good for your credit rating and will help get a better rate! :)


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RE: In the begining...

some debt is actually good for your credit rating and will help get a better rate!

That's a myth. The only debt I've ever had is a few mortgages and a single credit card that I pay off in full every month. I've always gotten the best rates. Carrying balances doesn't help.


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RE: In the begining...

Carrying balances on a credit card is bad - having ongoing credit card debt is not good for your credit rating, or your finances!

Having a diversity of debt that you make regular payments on, car loan, student loan, mortgage, is actually go for your credit. I was advised not to pay off my car loan as it may actually bring my credit score down.


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RE: In the begining...

1. Start looking for a builder. Usually they are a good resource to tell you what type of plan will work on your lot and they may have banking relationships that could help you. Like a loan officer that they have a good relationship with. You could also email them plans and get ball parks so you know how much sq ft you can really afford.

2. Look for a plan while looking for a builder. I had to go to an architect because my lot was a bit tricky. Plus I wanted something unique. For some finding the right plan takes a LONG time. So get started as early as possible.

3. Get a pre-approval and push all your documents through underwriting. This will be the most honest assessment of your credit worthiness and what you may need to work on to get approved. You will also find out how much money you need to save and how much debt to pay-off.


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RE: In the begining...

I don't subscribe to the 'good debt' theory because people who advocate this always fail to consider the risk factor of owing money. Having your debts paid off is not an unattainable goal if you get your budget in line and live below your means, IMO.

Having installment loans on your credit report certainly does help to increase your score to a degree but it also lowers your debt to income ratio and you may not qualify for as large a mortgage as you need. I'll take the security of owning all my stuff outright over a higher FICO score any day. That's what manual underwriting is for...


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RE: In the begining...

Thank you for all the replies with great information!

Kirkall - I'm sorry about those 18 houses! I have an idea of what you might be feeling by watching my mom in law go through the trauma of losing all the woods on one end of their property to a development - sad, sad mama. Can I ask (because this is my biggest fear) - any tips on actually researching builders in the area (HELP)? I feel like I'm just googling in the dark. I don't know anyone who has build a home to get personal recommendations and feel like this is where I'm stuck and not able to move foward.

The land was a gift from our parents and has been owned outright for 40 years or so, so no recent loan outstanding. Since property values in Kirkland tend to be higher than rural areas, I'm certainly hoping that the value of the home with be higher than our cost to build since that factors in land value correct? Thanks Laura 12 for your experience - I was wondering if paying for the design fees ect, would be better paid out of savings than from a loan. I will sit down with those three banks and BECU this next week.

For finances - We've met with two realtors who gave us a list price that, if we get to close to that would enable us to pay off all debt and probably not have anything left. We have good credit, but I was hoping this would give us a chance at the best rates possible when time to take out a loan?

Thanks GAonmymind - I printed out your to-do list and taped it to the fridge :)


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RE: In the begining...

The banks I spoke to would not provide funds under the plans were complete as they need to appraise the value of them to find the loan. Most also give you a specified amount of time to build, so you are expected to have permits and be ready to start building when the loan is funded.


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RE: In the begining...

Are you IN Kirkland? (hint, my username is not a version of my legal name... And, my email is enabled on this forum if you want to PM me.)

Are you interested in building a totally custom home, or a semi-custom home?

One way to start would be to go to some open houses of some of the short-platted developments--both in-progress and finished. It would give you an idea of what builders are in the area, what is common (and whether or not you like that), etc.

Also, go to the Washington licensed contractor listing online to verify licensure and to see if any complaints are filed against them.

You are correct that land values in Kirkland are high. Though, they are lower than they were 5 yrs ago. But, compared to 40 yrs ago... well, you get the picture. Also, depending on WHERE in Kirkland you are, the value of the land/home can vary greatly--you in Houghton or Finn Hill/edge of Kenmore? (I am sure you know all of this). But, I don't think you will have much trouble making your appraisal unless you just build a ridiculously-sized home in a margin neighborhood. Be realistic with the size and style of your home, in comparison to what is around, and you will be golden.

I did not build my house, though we did do a HUGE addition (grew the house by about 50% of the original). But my "builder" really does remodels, as far as I know (I could ask though. He certainly needed all the skills/subs for the remodel that a new build would require).

So, perhaps a PM would be in order. And, then spend some time touring new houses on the Eastside. (btw--the developer building right behind me does also build custom houses. They've built a lot in Kirkland; live in Kirkland, etc. But, so far, I can't vouch for them, since I've not lived in one of their houses. I could point you to a street 2 blocks from me though, that was built by them about 6 yrs ago... In fact, one of those houses is newly for rent... You might be able to get in to see what a house built by them looks like after 6 years of living (with small kids in the house).


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RE: In the begining...

Oh, also!
I don't remember the username, but check the monthly progress pictures on this build forum for a gal building in Edmonds, with water view, and she likes to post pics of her baby with house progress pics (at least she did 6 months ago)... If anyone knows which member I am thinking of, could you help us out? I'd ask her how she likes her builder, how she found them etc.

The home show is also a popular place to find builders. But, in all cases, call several references. My remodeler makes it a priority to have his customers be credible references when he is done and has a VERY long reference list. I called several of them before we decided to use him. We are now on his list.


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RE: In the begining...

Graceshan is the one with current build pics in Edmonds... If you go to the threads with "It is August...how is your build progressing" pics for each month, you will see hers.


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RE: In the begining...

Carrying balances on a credit card is bad - having ongoing credit card debt is not good for your credit rating, or your finances!
Having a diversity of debt that you make regular payments on, car loan, student loan, mortgage, is actually go for your credit. I was advised not to pay off my car loan as it may actually bring my credit score down.

Totally agree with you laura12. Diversity of OPEN ACCOUNTS is good.
Carrying low to no balance is what makes the FICO go up.

We worked @ this for 12 months prior to submitting our apps & monitored our FICO scores religiously.

We have about 15 installment accounts opened between the spouses & reduced our debt constantly while cutting back on all spending during these 8 months prior.

We never closed any accounts, fixed all credit reporting errors & payoff what we could.

It was hard work but the payoff is a high 700's FICO score for both & soon to be no installment debt burdens except the new home loan :)


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RE: In the begining...

Posted by parsonse (My Page) on Tue, Aug 21, 12 at 18:16
For example, we poured our concrete footers yesterday at a cost of around $7000. We paid COD which saved us around $1000 but we couldn't get an advance on the construction loan because they only release draws after the work is completed and inspected by the bank officer. To save money, I wrote a personal check and will submit the receipts to the bank for reimbursement.

Great idea. Not sure if my bank can keep up with this kind of logistics but might be worth it for me to try!


We also paid out of pocket for plans, permits, insurance & builders risk policies, as well as the demo for our old house. Our loan manager said we could submit those receipts for reimbursement as well but we had a decent cushion set aside for the build and would rather pay those costs up front instead of financing them for the next 15 - 30 years. :)

We did that also because it was part of our 20% down pmt. So we actually, came to the settlement table with less than 20% - sort to speak - since we had paid a portion of that 20% in advance for those items already.

This line also sums it up very good from gaonmymind:
... underwriting. This will be the most honest assessment of your credit worthiness and what you may need to work on to get approved. You will also find out how much money you need to save and how much debt to pay-off.


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RE: In the begining...

Hi! I noticed that several posters in this thread are from the Seattle area which is where we're looking to build (south-easterly 'burbs to be exact) and I was wondering if anyone can give me a rough price per sq ft. I'm looking at about 3,000 sq ft, 2 story, with fairly high end finishes. We've found some lots we like, but I have no idea how much it is going to cost to build.

Homes in our area with similar finishes seem to be between 700-800k, so after the price of the land is taken out(~200k) that works out the be between $160-200 per sq ft. Does that sound right?

Also, I would love any builder suggestions! Thanks in advance!


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