Construction Loan Questions
I’ve been following oil/economy trends for several years now, and I consider myself pretty knowledgeable on them. I believe that we’re headed for hyper-inflation and prohibitively expensive gas/oil within 5 years. Based on those assumptions/conclusions, I’ve decided that it’s a good idea to build a zero-energy home relatively soon (currently rent in urban area). I know why I want to do this, but I have little experience with the (financial) how…
The land is already taken care of, so what I’m interested in is the working of a typical construction loan. I had a few general questions about this, that hopefully someone can answer/has experience with:
1) How far in advance of actual construction can one typically secure a fixed-rate (let’s say, 15 years) loan? Obviously, I’m interested in locking this in as soon as possible but probably won’t realistically break ground for another 20 months. My assumption is that if and when hyper inflation occurs, a loan secured at today’s super low rates becomes much easier to repay.
2) Has anyone recently built a zero-energy home? Any estimates on how much it would cost for a small (~2,000 sq. ft.) home?
3) What kind of strings are typically attached to basic construction loans? For example, is it possible to secure a larger amount than you need with the intention of purchasing gold with the excess to create gains to pay back the principal?
I’m obviously early in the process of these logistical matters, but I’m interested to hear people’s thoughts and experiences.
I built my home in ’02 and have other experience in this area.
Typically the construction loan works like this:
You sign the documents, they give you an initial draw to get you started (usually you will also have to have some of your own funds available for construction) and the clock starts ticking. There is a time limit, in my case it was eleven months.
You proceed with construction until you have completed a specified phase as outlined in your budget that you will have submitted as part of you application. The lender will send out an inspector and if that phase or portion of the work is completed then they will issue another draw for that corresponding amount.
Rinse and repeat until completion, usually indicated by an occupancy permit issue by the relevant municipal building dept. (where you got your building permit).
Typically, if you exceed your alotted time, you’ll be charged a penalty for each month you are late. I ran two weeks over and they tried to charge me $1,800 for an additional month, but I had previously had a disputes with them because their payments were continually late causing job delays due to lack of funding. I had written several letters of complaint during the process, documenting the delays they had caused, and they relented on the penalty.
With all that in mind, I seriously doubt that you could arrange a loan that far in advance. A construction loan is just that, for construction.
Costs can vary wildly. When I built, a rule of thumb guidline was $100 per square foot minimum. By the time I finished this ‘rule of thumb’ had climbed to $200 per square foot, but I think that’s kind of high. This was for conventional construction. A zero energy home would probably cost more, but maybe not. I think that is more a function of design rather than construction.The cost is also going to be relevant to your design and the level of interior finish (granite countertops vs. other, quality of appliances/fixtures etc.). There are also regional differences.
As far as securing a larger loan for other purposes (gold) that might be difficult. They typically require a construction budget and will scrutinize that to make sure that you are not underestimating nor overestimating costs. They will secure the loan at a higher amount than requested and keep the diffrence as a reserve so that they can finish the job if you run over budget or walk away for some reason. They aren’t going to be inclined to fund more than construction costs, although you can probably skim a little here and there if you overestimate a little on all the budget items in your cost breakdown. But they aren’t going to fund more than maybe 80% of the projects worth at any point in the process.
There’s a lot more to be covered but that’s a start. I hope it helps.
Peaker Seaker, I’ll take a crack at your question 2.
I build net zero houses in the Louisiana market. In terms of construction costs we are starting at a base house using SSIPs (Steel Structural Insulated Panels) for a very tight envelope in walls, floors and roof. You can check out our standard features list on our web site at http://www.RoadHomeBuilders.com but in a 2,000 sq. ft. home figure about $105-$110 on the low end and it goes up from there. Solar PV will add another $6,000-$7,000 per kw (approximately depending on racking, equipment selection, etc.). Solar panels should be sized for the house, the lifestyle, the location and orientation of the house as well as the specific needs of the occupants.
Net Zero means that you are tied to the grid and when the grid power goes down, so does your solar power since they don’t want it feeding back into the grid and a lineman getting killed. If you want off grid you are talking significantly more money in terms of batteries, controls and maintenance. I’ve been told that many people that live off grid have trouble maintaining their first set of batteries but we haven’t built any off grid so that is heresay…just something to be aware of though.
There is a 30% tax credit for solar at the Federal level through 2016 (if we make it that long) and also here in Louisiana we have a 50% tax credit which really helps the homebuyer offset the cost of solar.
We will typically take about 4 months to build a home from permit issue to completion. Figure another month for Murphy’s law but you shouldn’t have to much wiggle room if you are prudent about selections up front and not to many changes through the process. The more you deviate from the plan the longer the construction process and the more costly the project.
If you have any further questions email me at [email protected]. Hope this helps and good luck.
My experience was similar, although in the ’80s and we were the General Contractor. We took draws based on vouchers and each portion of the process had it’s alloted budget – foundation, framing, etc, which we set (front load in case you underestimate). There were only a few years in the history of mortgages where brokers were able to get away with writing loans for more than the value of the property and those days are over. I doubt they’ll loan more than 70% on a construction loan if that with the current inventory overhang.
You need a good set of plans from which the bank will estimate the potential market value of the finished house, and of course good bids and probably nowadays a general contractor but I don’t know that. Be careful about municipal fees, site conditions – especially if septic/domestic well, property lines and setbacks, utility connections, non-standard construction, to name a few. Oh, and disagreements with your SO on finishes…
It’s a lot of fun and really an adventure.
BTW, 2,000sf isn’t really a “small” house unless you are Mother Hubbard!
Haha, fair enough. I just kind of pulled that number out of thin air – we do definitely want a small house, however many square feet that is. Looks like some great info. out there. It makes sense that you can’t get the loan way ahead of time, but it’s definitely scary waiting to see what happens to inflation and rates in the meantime…
The land is already taken care of, so what I’m interested in…………….
Does this mean that you already own the land? If so, maybe you can consider selling the land and buying another piece with a fixer-upper that you can convert to zero energy. Currently existing homes are selling for much cheaper than construction costs for new. Financing would be much easier (maybe) than securing a construction loan and then a conventional mortgage. The process would be quicker too. Just a thought.
Most of you questions have already been answered. For clarification, I ‘d like to mention that you will be looking at 2 loans, depending on where you get you loan, you may obtain both loans from the same bank/broker/lender – first the construction loan that will be advanced in bits and pieces as your construction progresses. Getting this loan will be easier if you have a reputable contractor who has given you a contract price. It usually is interest only paid monthly based on a percentage rate added to the then current bank prime. This means that your rate will change as rates in general increase or decrease. The rate is usually several percentage points higher than permanent mortgage rates and usually have added fees. Not uncommon to have the effective rate over 10%.
You are also looking for a permanent mortgage to replace the construction loan when construction is complete and the risks associated with construction are behind you. Hopefully this will be a rate similar to the rates currently being quoted to finance existing home purchases, however it is unlikely that you will be able to get a “locked” interest rate until very close to actual funding when construction is complete. Your risk is that rates may change between now and then. Also, remember that the “Loan commitment” sounds firm, and usually will be honored, but most lenders leave a way out if they don’t want to fund at the last minute.
I agree with Earthwise that if you can find an existing house that suits your needs at a good price you may come out ahead. The cost to modify an otherwise good house by adding insulation, fixing windows, re-doing the heating/cooling system and adding solar may end up being less that building from scratch given the price today of used homes in most of the country
You seem to be aware that with interest rates at historic lows they can only go up from here. That is a strong reason to start construction as soon as you can if you are going to build. Waiting 20 months is risky.
Let me echo two things you have gotten as comments, and then add something new. First of all 2,000 SF is not small unless you’ve a huge family. How many people are you housing? We have a three-bedroom ranch with two bathrooms ansd a huge kitchen and dining room, and it is only 1,100 SF. Secondly, existing homes are easier to get loans on.
I spent the last 15 years in the construction industry. They’ve overbuilt, and with all the people in financial trouble there are lots of homes on the market. I heartily agree that retrofitting an existing home will be less expensive and easier to finance, if you can go that route. But…watch out for foreclosures. There is, as you will read on other threads here at CM, no clear chain of title on a lot of these forclosed homes. When investment vehicles like CDOs were made in bundles of motgages the chain of title was broken and now NO ONE knows who owns them. With a foreclosure you might buy it, remodel it, and end up being kicked out when the previous homeowner sues the bank to get it back. On the grounds that the bank did not truly own a property they foreclosed on, I understand that in some cases the lawsuit might favor the previous owners.
Very interesting stuff here.
After a bit of preliminary research I can see that 2,000 was definitely an off the mark estimate. I guess it was a good idea to start chatting on here before convincing myself I knew anything about house construction… We’re looking at a basic small 2 bed, 1 bath with some small extra areas for an office and food pantry.
Regarding the suggestions to sell the land and/or buy and remodel, those are definitely logical ideas but probably not what we’re looking at based on our specific circumstances. The land is an amazing piece of property that’s available for very cheap through a family member. And I’m envisioning a house design that I think will be much simpler to create from scratch than retrofit. In fact, I’d be interested if anyone has thoughts or experiential feedback on the following design features:
I want to use some variation of the geothermal envelope technique. The ways I’ve heard of this being done combine insulating the outside of the house and then either: a) building the entire frame and walls of concrete to “soak up” and radiate the constant 50’s temps from the ground or b) leave the inner portion of the envelope open (forming channel between basement and first floor) and run fans to circulate the mild air.
Also want to put in a compost toilet. Sounds cheap and awesome and helpful, but I’ve never actually seen one or seen it in use.
We’re hoping that thick, south-facing windows will provide enough heat to grow greens indoors year-round (we’re in New England).
And finally we want to have either solar or wind-provided electricity with a grid hookup for emergencies/net metering.
Small, cheap, and zero energy – what could possibly go wrong?