What to Expect When Building a House – Financing
Financing is the most STRESSFUL part of building a house– especially in this economy.
Talking about what to expect with financing is rather difficult because the terms are different for everyone! But I can help walk you through the basic steps.
Before you even begin looking at houses it’s wise to go ahead and get pre-approved….this will help you out whether you’re building or buying an already built home.
Getting pre-approved is the VERY BASICS of the approval process– you’ll have to submit your credit information, proof of income, debt to income ratio, and proof of self. By getting pre-approved for a loan you will know how much house you can afford and how much money you will need at closing. Depending on your lender, about 1-7 days after applying for pre-approval you will receive a Good Faith Estimate.
What is a Good Faith Estimate?
This is a sheet that tells you exactly what your home loan will cost you. It has your tentative interest rate, mortgage payment, closing costs, down payment, all fees associated with the loan, etc– ALL of these figures can change– but this will give you an estimate of the costs.
Why can’t the loan officer tell me for certain what my costs are?
The Good Faith Estimate is just an estimate. Interest rates fluctuate on a regular basis and you can’t lock in your interest rate until about 60 days from closing. Some lenders will let you float an interest rate– but it’ll cost you– they charge a premium if you want to lock in your interest rate early. Your interest rate directly affects how much your mortgage payment will be.
What happens once I’m pre-approved?
Once you are pre-approved you will receive a pre-approval letter that can help you in negotiations or securing a lot if building. Our builder required the pre-approval letter when we submitted our deposit for our lot– it’s a good thing we were pre-approved ahead of time because there was another person looking at our lot the same day and he was still “thinking” so we were able to secure the lot immediately….and it was the last one that would hold the house we wanted!
So you’re pre-approved, you found your future home…..now what?
Now it’s time to hunker down and begin the approval process! This is the stress inducing part– but once it’s over you can sigh some relief and continue enjoying your home building/buying experience. Depending on your builder you may have to go through this before they even begin building your home– we had to have the loan complete and floating before the builder would break ground…but this is a good thing because now we can just enjoy the building process.
Your loan officer will order an appraisal– even if your home is not built yet (they will use the blueprints for the appraisal). The appraisal is stressful because you’re appraisal needs to come in ABOVE the price of your new home, with upgrades and everything, or your loan will not be approved– unless you pay the difference out of pocket. When building, this appraisal is based on other homes in the same neighborhood– this is when you DON’T want the nicest house in the neighborhood! The appraisal is based on price per square foot— and doesn’t take into account a majority of upgrades– nicer cabinets don’t count, lighting packages don’t count, blinds don’t count, nicer appliances……basically anything that is not structural will not count in the appraisal….it’s the building construction, size of house, and structural additions that will help you the most.
While the appraiser is working up the appraisal your loan officer will be working with the underwriter getting your loan approved and written. They will ask for EVERYTHING…. bank statements, paychecks, copies of cancelled checks, W-2s, tax returns, 401k statements, credit reports, letters explaining different things….they may ask you for some crazy stuff but you’ve got to get it to them as fast as possible! I had pages and pages worth of stuff that I was scanning every day and sending over to the loan officer. There will be TONS of paperwork to sign and turn in!
We had to submit letters for everything from any deposit over $500 to the difference in Hubs name on his social security card and driver’s license…one has the Jr the other doesn’t!
And make sure ANY and ALL deposits that you make come from the accounts you plan to use for your down payment.
This process took us about 2 weeks to complete but now I can rest easy that we’re pretty much done except for updating a few documents and submitting fresh bank statements once we’re ready for closing.
The approval process is not fun, and caused many arguments between me and Hubs because he’s such a private person….which you can’t be when applying for a home loan. Your entire financial history will be exposed and dug through and you will have to explain every little thing you have done in the past several years, you will have to explain every single blemish on your credit report, you will have to explain every deposit…..it’s an intense process.
But once it’s done you’ll feel so much better!
Have you missed any of the series What to Expect When Building a House? Make sure you check out:
The Road to Building a House