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Real Estate

2007-08-01 11:27:00

Loans and new construction

Answer: The basics are the same, but the logistics are a little different. First we start with the appraisal. Because the home is not yet built, the appraiser has to do the appraisal from blueprints and the construction spec sheet to determine the market value. The main thing to consider at this stage is that you put as much effort and attention as possible into your initial building contract so that all additions and subtractions that you want are shown on the blue prints. In most cases, the builder will have what is called a “red-line” meeting to go over the plans, and make sure everything regarding your expectations is covered and understood by both you and him. If something has been missed, it is added or changed on the plans with a red felt tip marker, and usually each party takes a set of plans with the red marking as a guide to what is supposed to be built. The appraiser will include any changes or modification in the appraised value. If a buyer/borrower decides to add things after the home is started, it is hard on the builder and expensive for the buyer, so you want to pay close attention to what you’re doing at that “red-line” meeting. Builders usually charge $50-100 for each change order that is agreed to during the construction process. The builder takes on the added responsibility of getting the new information to his subcontractors, the people on the job site that will actually perform the work. The buyer should also make personal inspections of their own periodically to make sure the changes have been communicated to the craftsman on the job. Most building contractors will welcome the additional attention to detail, as long as you don’t try to be a micro manager on the site, thereby upsetting his subcontractors. The credit approval process is much the same as for a resale home, but sometimes things must be updated, for example, if the construction were to take longer than originally estimated, which is not uncommon. The borrower also needs to keep in mind how much they have been approved for with their financing package. If the change orders add up, and they want to include them in their new loan, the change orders need to be submitted to the mortgage loan officer so that the adjustments can be made in both the home value and the loan amount. If this can’t be done, then the items will have to be paid for by the buyer, in cash, at closing. Sometimes the builder will require these items to be paid for at the time the change order is completed, so that there will be no complications down the line. The only other big difference is the interest rate risk. In most cases, the rate quoted by a mortgage lender is for a loan closing in 30-60 days. A build job will take 120-180 days, depending on supplies and the weather. In this case the borrower needs to monitor the rates until the project is 30-60 days from completion, or alternatively, check into the option of using a long-term lock. There are a variety of different programs for this situation, details of which will take some research on the part of the buyer. Many people build new homes every year, and it should be an enjoyable and exciting experience. If it’s not, it is almost always due to changes during the construction process that don’t go well. This anxiety can be removed if all the components for the home are included upfront and included on the original set of plans and specs. More next month…