Constructive Conversations
Welcome to Constructive Conversations with co-hosts Zac Daniel of Victorian Finance and Luke Barksdale of Viz3Dspace. This podcast is designed to take the confusion out of new construction and give you the knowledge you need to confidently begin your homebuilding journey.
Each episode, we break down the process step by step including everything from financing and design to builder relationships, budgeting, and the real questions homeowners should be asking before they ever break ground. With perspectives from both the lending and design sides, we’ll equip you with practical insights, industry knowledge, and the confidence to make informed decisions.
Whether you’re buying your first home, building your dream home, or simply curious about how it all comes together, Constructive Conversations is your go-to guide for navigating the world of new construction.
Constructive Conversations
Episode 5: How Mortgage Finance works for New Construction
Stepping into the world of new construction financing can feel like trying to build a house without blueprints – confusing and potentially disastrous. In this eye-opening conversation, loan officer Zac Daniel demystifies the process of securing a mortgage for a home that doesn't exist yet.
The financing journey for new construction differs dramatically from buying an existing home. Rather than the typical 20-60 day closing timeline, construction loans operate as interest-only lines of credit during the building phase, with payments that grow only as funds are drawn. Zac breaks down how appraisers evaluate plans and specifications to determine what your future home will be worth, and how this projected value becomes the foundation of your financing.
Perhaps most surprising is the flexibility available in down payment options. Contrary to the common belief that new construction requires 20% down, Zac reveals programs requiring as little as 5% down payment, with VA and USDA options offering 100% financing for qualified buyers. For those who already own their land, that equity can often serve as the entire down payment, potentially allowing you to build with no additional cash out of pocket.
Self-employed buyers face unique challenges with traditional mortgage qualification, but Zac explains how non-QM loans can evaluate bank deposits rather than tax returns, opening doors for entrepreneurs who maximize deductions. When evaluating builder incentives and preferred lender offers, getting written loan estimates allows for accurate comparison rather than relying on verbal quotes that might change when application details are finalized.
The golden rule for new construction financing? Never max out your budget. Construction inevitably involves surprises – from site preparation challenges to material price increases – and maintaining financial buffer room ensures these unexpected costs don't derail your entire project. With expert guidance on rate locks, appraisal considerations, and loan conversion options, this conversation equips you with the knowledge to finance your dream home confidently from foundation to finish.
Ready to build your future home with financial confidence? Listen now to avoid costly mistakes and discover financing strategies that could save you thousands.
Welcome back to Constructive Conversations, the show where we're going to break down the new construction process so that you feel more confident every step of the way. I'm Zach Daniel, with.
Speaker 2:Victorian Finance and I'm Luke Barksdale with Viz 3D Space. Today we're going to be diving into a topic that confuses a lot of buyers Financing a new construction home. Getting a mortgage on a house that doesn't exist yet is a little bit different than buying one that's a pre-existing home. There are some important things that you're going to need to know before you sign a contract with a builder Zach here.
Speaker 2:He's been a loan officer for about 10 years and has spent the majority of that time specializing in new construction. He's going to tell us how the process works, what loan options are out there and how to handle things like rate locks and appraisals and, of course, some of the biggest mistakes that you need to be avoiding. So, whether you're thinking about building from the ground up, or maybe you just want to understand your options, stick around. This episode is packed with practical tips. So, zach, just kind of kicking this thing off what most people think of when they're getting a mortgage, they're picturing, you know, buying a house that already exists versus, you know, maybe acquiring a piece of land and purchasing a house that doesn't exist yet. So what changes?
Speaker 1:So really, the biggest change is going to be the timing of it all. If you are buying a house that's pre-existing on the market, you're doing a traditional purchase, where the seller is selling the home, there's a basic sales contract in place and you can structure it with. You know conventional fha, va, usda. You know, whatever is the approved loan that you're seeking for, generally those turn times are anywhere from 20 to 60 days, depending on the loan program and everyone's timeframes. When we're talking about new construction, there's what's gonna be called a construction loan portion of it, so you can buy the land under that construction loan. Generally, there's only plans and specs to work on, and so how the loan works is we're going based off the completion and what the estimated value is going to be okay, so you're looking at it as if the house has already been built, correct, and then you're comping that, or you're finding comps for that in the market as it stands Absolutely.
Speaker 1:It's very important, especially with a construction loan, to really lean on what the appraisal is going to be. The appraisal is a really key aspect of a construction loan when it comes to financing, because the appraiser is going to take the plans and specs and the value of the land and, overall, give value of what that completed product will be and that will determine what your mortgage can be okay and so when I know we've ran into this in the past with some clients, when the appraisal happens, I know homeowners don't feel like that can ever be like changed.
Speaker 2:That's the gospel truth. We got the appraisal in. That's what the home's worth. Is that the case?
Speaker 1:or talk to us a little bit about the appraisal yeah, so each appraiser is going to value things a little bit different, so you can have an appraiser set value and then have a different appraiser come out and appraise the same home and chances are it could vary, so there is some variation. When it comes to appraisals, they're generally working off what's called the comp structure.
Speaker 1:So, they are looking at comparable houses with similar finishes, fixtures, square footage that have sold within a radius of the home within the last six to eight months, and so they're kind of looking at where the market is in your specific area to help justify what that price value is going to be.
Speaker 2:I got you. And so when people new, new build clients, when they're dealing with a builder, you know I've seen takeoffs two different ways right, I've seen just kind of like hey, here's a takeoff and here is a bucket that you can pull money out of to go get your finishes, so your floor, and maybe like $4 a square foot, you go your flooring versus a builder that gives you like a line item budget as a lender. When you're getting those quotes back from builders, you know are are those different and how you're getting those back, does one help appraisals versus the other, like does it bear any weight.
Speaker 1:Yeah, you know, when it comes to finishes, it doesn't really vary in the appraisal that much. Now you know if square footage is I know we've talked about it plenty of times square footage is where the value is and that's the same when it comes to the appraisals. I mean, the square footage amount is really what's going to bear the biggest weight on the appraisals. You know, if you have a granite countertop versus a formica countertop, there's going to be some value there, but it's not just going to sway the whole appraisal. You know, thousands of dollars or anything like that.
Speaker 2:I got you, so let's talk about the loan options a little bit. I guess. So uh, breakdown down for us the different types of loan options and maybe some differences between a construction loan versus, like, a traditional mortgage yeah.
Speaker 1:so really biggest difference between a construction loan and a traditional mortgage is going to be the construction loan is done up front, and there's two different types. You can either do what's called a one-time close or a two-time close construction loan. What that essentially does is gives you the financing for the build as essentially a line of credit, and that is what the builder pulls from. You pull from to finance the build, and then it will automatically convert if it's a one-time mortgage or if it's a two-time mortgage, you'll refinance and pay that loan off into what your permanent 30-year, 15-year fixed mortgage is, whatever you want.
Speaker 2:Okay, and a construction loan, is that? That's a secured loan, right, so you're yes, so doing what with that?
Speaker 1:it is an installment loan. It is secured to the property itself. Generally you'll see construction loan terms be six months or twelve months. They're set up like interest only balloon payments, and so at the end of the term it is due and your mortgage will pay off the construction loan.
Speaker 2:Gotcha. So I know, as a homeowner myself, I know when I went to buy my house, one of my first things like, how much cash do I have to come out of pocket?
Speaker 1:at the table.
Speaker 2:So as far as down payments and what can be used for down payments, talk to us a little bit about that.
Speaker 1:Yeah. So, generally speaking, when you think of a construction loan, it has a stigma behind it that, oh, you need 20% down payment to get the construction loan, and that's really what everyone has always been told. At Victoria Finance, though, we do have loan program options with minimum down payments. I mean I can do 5% down for a construction loan. If it's VA and the appraisal's right, then we can do 100% financing. That's awesome.
Speaker 1:We can do USDA at 100% financing. So you know there's all kinds of variations. I would recommend shopping around looking at different lenders and different programs, because there isn't just a standard of what is due as a down payment anymore.
Speaker 2:Right, and so it's different too I know me, and I've talked about it whether, like if you have a piece of land that you own too, I know me you and I've talked about it, whether, like, if you have a piece of land that you own, versus maybe you're wanting to buy a lot and build on it at the same time, you know, can. What are some different things you can do there.
Speaker 1:Yeah, so if you already own the land and say it's owned outright, you know you don't have any land loans or anything on it, then you can build on that and the land itself will have value. So, like I mentioned before, the appraisals are just real key in new construction, because once you have your house plans and your designs done is valued at $100,000, then you're looking at a value of a completed home at $400,000, and the appraisal will notate that. And so then, when it comes for well, how much can I get a loan for? Well, if we can lend up to 95% loan-to-value, assuming that 5% down payment, you've got a lot more room with that end value there to roll in additional costs.
Speaker 2:Because you're doing 95% of the $400. Correct On that. So they can essentially take the equity in their land and use that as a down payment and come to the table with no money down. Absolutely, that's awesome.
Speaker 1:That is a down payment and come to the table with no money down. Absolutely, that's awesome. Now, the difference is, if you don't have land and let's use that same scenario you've got house plans that is going to cost you $300,000. Right, they've had that drawn up, they have a builder and they're like awesome, yeah.
Speaker 1:I've got a $300,000 budget that I'm working on. Then they want to go buy land and they find land that may cost $100,000. Well, all of a sudden, this build is going to cost you $400,000, because you also have to account for purchasing the land plus the build. And yeah, we can do 95% loan to value, but now you're having to come to the table with a 5% down payment of $400,000, not $300,000.
Speaker 2:I got you. You had mentioned earlier just some special program stuff like FHA, USDA. I think you said something about VA 100% financing, so tell us a little bit more about these special program loans.
Speaker 1:Yeah. So again, generally speaking, with construction loans dealing with banks, they're going to require like 20% down payment. There really hasn't been any variation in history. It's just construction-to-perm loan and it's set up as a conventional loan. So with FHA and VA we can accept that same underwriting criteria that FHA would adhere to, or the same VA requirements as a traditional mortgage underwriting, and with VA we can do 100% financing as long as you have what's called your certificate of eligibility. You have what's called your certificate of eligibility and that is given to you by VA to basically say how much you were allowed to finance, based on if you are exempt from certain funding fees or what your benefits from VA are going to be, if you've bought a VA home or not. So depending on the price point, it will determine how much you can lend and in a lot of cases you can do 100% financing with VA.
Speaker 2:Yeah, I think there's some misconceptions out there that just because you are VA, you're entitled to the same financing as the next VA person is. So you got a buddy that was able to build one for a max of 650,. That's going to be you too.
Speaker 1:No, I mean, it's all about what your eligibility and requirements are for VA as to what you're able to lend and build with. Some other special financing options that we can look at are non-QM loans. Non QM has been a very popular option, especially now that rates are a little bit higher or people are picking up more second jobs or there's more entrepreneurs now and looking at creative financing, and so what non QM stands for is non-qualified mortgage and that essentially, is your one-offs like bank statement loans or DSCR loans, right? So what a bank statement loan is is great for self-employed buyers. If they file their income taxes and they write off a lot of additional expenses so that they are not paying higher taxes because they're self-employed, they may show a loss on their income, on their taxes, or very little income.
Speaker 2:Sure.
Speaker 1:But a bank statement loan would review the deposits in their bank statement and average it out to come up with your actual net income. Typically that's going to be a lot higher than what your tax returns show, and so we can use that income to qualify. Now the downfall is it does require at least 20% down in most cases to do financing like that. But you know I've done construction loans with those kind of programs before. So even people who are self-employed are not limited to oh, I can't do, I can't build a house because I need one of these programs, and typically they run into places that don't offer that kind of financing.
Speaker 2:I got you. So if a self-employed person had a piece of land that they had paid off, that was 20% of what their build was going to be and they did a bank statement loan. They're still coming to the table with no money down. Oh, absolutely.
Speaker 1:Yeah, it's a fantastic product.
Speaker 2:So we talked about the VA stuff, we talked about some of these specialty loans. We kind of covered down payments a little bit, but what are like some other fees and things that people are going to see in a new home or new construction loan that maybe we can wrap it in?
Speaker 1:Yeah, so you know there's always closing costs with any purchase transaction. That's the same with a construction loan that, generally is going to run anywhere from 2% to 3% of your total purchase price. Is going to equate to what your closing costs and prepaids and escrow build-outs is going to be?
Speaker 1:Yes, and the short answer is you can wrap that in, like we mentioned before, if you own your own land and there's plenty of equity in the land to cover your down payment and your closing costs and still meet those loan value thresholds, then yes, you can roll that in. You know, if you are purchasing the land and building the home at the same time, there's nothing to be able to roll that into.
Speaker 2:So a good question does it have to be the land that the house is being built on? So if they have another piece of property, so maybe they've got two pieces of property, maybe they've got like a recreational piece, 100-acre hunting place and then a one-acre lot and they're going to build a house in a subdivision. Can they use the equity from another property?
Speaker 1:oh, yeah, absolutely. We can look at creative financing options. Um, you know, if they want to leverage their 100 acre hunting land, you know we could look at doing what's called like a line of credit off that land and they are able to buy the lot or finance the whole build, for that matter, if there's enough equity into it, and then they are just having the one mortgage on the land. Then, after the home's built, we can look at doing what's called a cash-out refinance and then pay off that existing land that they leveraged to build the house with. So there's all kinds of options. I mean, I've looked at doing cash out refinances on people's automobiles before to come up with a down payment. As long as something is secure, it's a usable source as a down payment is secure, it's a usable source as a down payment.
Speaker 2:okay, that's awesome. And then, as far as you know I know we talked about the va and the fha and usda um, but just because you qualify, so look, just say you have advantage of it is that always the best route to go or is, like conventional, still a pretty good option for some of these people?
Speaker 1:Yeah, so you know it. It does vary. Uh, typically government backed loans like VA, usda, fha are going to have a little bit lower of a interest rate than a conventional loan was. Um, but you know there are some options that you really got to consider. Say, for example, someone is eligible for VA, they're putting 30% down payment on them. If they were going conventional, they're not going to have mortgage insurance. They're putting down enough of a down payment to avoid that mortgage insurance but say they're not exempt from VA eligibility guarantee fee.
Speaker 2:Right.
Speaker 1:And so they may be looking at having VA's quote unquote mortgage insurance, even though they're putting 30% down.
Speaker 2:Okay.
Speaker 1:But if they went conventional they wouldn't have that and you know the rate may be a quarter of a percent off from each other. So it's worth looking at and seeing what is gonna be the best route to look at there so what I'm hearing is it's not really form fit.
Speaker 2:It's something did you see, examine every time? So like, just because you qualify for VA doesn't mean that's necessarily the best financing option for you.
Speaker 1:Absolutely, and just working with your loan officer to know the differences and giving you different options is really key.
Speaker 2:Okay, and so one thing you said was mortgage insurance. I mean, just real quick, what is that? And what is the amount they need to pay to not be worried about it?
Speaker 1:Yeah. So mortgage insurance is set up a couple of different ways. There is private mortgage insurance or PMI, and that is on a conventional loan exclusively. You can have monthly private mortgage insurance, you could have single paid. You could have single paid, you could have lender paid, or you could do split, and really the difference in those is if it's monthly and that's included in your monthly payment. If it's single paid, you can prepay that amount in your upfront closing cost. Prepay that amount in your upfront closing cost or, honestly, if there is enough room in your loan to value to qualify, you can roll that back into your overall loan amount and make it financed over 30 years.
Speaker 1:To really lower the monthly payment, you can do lender paid, which your lender can price out and quote for you. That generally, though, will increase your interest rate to cover that amount, but still it could be a cheaper option than the monthly paid and saving money out of pocket. If you build it into your interest rate, or split and split will reduce the amount you pay monthly and finance a portion of it into your loan, or you can pay that finance portion in cash at closing too, so you can really split up those options. How to avoid mortgage insurance is putting at least 20% down on a loan. Having that 80% loan to value is what makes mortgage insurance drop off, and the reason that there is mortgage insurance on a loan is simply what it is. I mean, it is insurance for the mortgage company, so if you were to default on your loan, then the mortgage company is insured and can recoup some of that money back.
Speaker 2:Okay, and that can either be done with cash liquidity or it can be done with equity in something as well.
Speaker 1:Absolutely, and so then, when you start looking at government-backed loans like FHA, va, usda, they have a type of mortgage insurance too. They do not call it private mortgage insurance. Typically they're called guaranteed fees or transaction HUD, transaction fees. So what those look like is they're also either financed into the loan as a single premium or monthly VA, for example, as the VA guarantee fee, and that's financed into the loan as a single premium gotcha.
Speaker 1:FHA is and USDA set up on a split, so they finance a portion into the loan and you pay a monthly portion as well.
Speaker 2:Okay. So if me and my wife are looking at building a house and I've got some land and I want to use that as the equity of the down payment, okay, I'm paying on that thing. We've done it, we've built it, we're going, yeah, like, at what point do I get that equity back? Do I have to pay the house completely off before that land is detached from that loan and I've got that free and clear again, or is it at some point during that process?
Speaker 1:So stop me if I'm going the wrong way. So you've got land that you're paying on and you decide to build a house on it, too correct, generally, with a mortgage company. If you are wanting to build a house on it too correct, generally with a mortgage company, if you are wanting to build a house, they're gonna wanna take what's called first lien.
Speaker 2:Gotcha.
Speaker 1:And what first lien is is it means that there's nothing else that is going to overtake the mortgage. If the mortgage company will succumb for the collateral for any kind of reason there is, it's another entity that's going to interfere with that or another lien holder. So if you have a loan on your land, the first thing that construction loan is going to do is pay off that existing loan balance of your land and then you will start construction with the rest of it. But that construction will account for the outstanding balance on your land so that it is the only loan on the land.
Speaker 1:So as you build the house and it converts to a mortgage like your, your land is already wrapped up into it and it's paid for okay and then.
Speaker 2:So we'll go through this. We get financing on the house, everything's approved, um, and the builder gets going here. So what does that process look like once? Once the builder builder's on it, do they have to be like an approved builder? And is there like how do the draws and stuff work? Tell us a little bit about that.
Speaker 1:Yeah. So with some mortgage companies, yeah, there needs to be an approved lender or approved builder list and they have to have financials reviewed and you know the lender themselves can say yes or no to working with a builder.
Speaker 2:And that's like a protection for y'all and the customer at that point, absolutely, absolutely.
Speaker 1:And generally speaking I mean that is very good practice. Now at Victorian Finance we've cut some of that red tape off. You know we're not going to go work with everybody, but we do kind of take off that underwriting of the builder and their financials so that you know as long as they're a licensed contractor. They've got a building license.
Speaker 2:Right.
Speaker 1:You know we meet with them.
Speaker 2:You're not red taping them to death where nobody can build.
Speaker 1:No, but so that is a process that some lenders will require, though.
Speaker 2:Okay.
Speaker 1:And then, when you were mentioning the draw schedule, require though, okay. And then, when you were mentioning the draw schedule, some lenders will require a. You follow their lender's draw schedule. You know it can be set up with four draws or six draws, typically throughout the build, and the builder would have to pretty much set their schedule around those draws because that's the only time that the bank is going to be giving them the money.
Speaker 2:It's hard to do as a builder unless you've got money to float the project along the way.
Speaker 1:Yeah, I hear it all the time. We've also removed the red tape from that on our end. So, if you know, at Victorian Finance and with our banking entity of Farmers Bank, we let the builders set their own draw schedule. It is a simple process. It is a simple conversation with the home buyer and the builder. Everyone signs a draw request form. So everyone is in full transparency of what is being drawn, when it's being drawn.
Speaker 2:But you can request money at any time and instead of having to like adhere to a draw schedule, okay and some, some questions we kind of put together beforehand was just like you know, a lot of builders offer incentives, uh, for like their preferred lenders. Um, you know, talk to us a little bit about that. You know, what should, what should buyers consider before you know saying yes?
Speaker 1:yeah. So with that, what you typically see is with some of the bigger builders and we've talked about before, like the production builders or track home builders, they'll have in-house mortgage companies with great incentives. Um, they, for the right people, can be a great package to look at. You know, you'll see, like fixed interest rates, 4% lower than where the market is sometimes, but not everyone always fits into that bucket, and so you may see it and it's a good advertisement to get you into the door. And then you start quickly realizing that oh, I don't actually qualify for that right and they turn you to all right, well, this is what you can qualify for, and you know they may be looking at a lot higher of an interest rate than if they were to go shopping somewhere else.
Speaker 2:Shit taking in a lot of car dealerships and stuff man, you know the reason being.
Speaker 1:the reason is is if a builder owns a mortgage company, their bottom line is the two companies together.
Speaker 1:So, you know, the builder may have its profit margin and lines, the mortgage company has theirs, but the bottom line is the same entity, and so what they are wanting to do is create these incentives by moving profit from one to the other and able to create, you know, these buy downs with these low interest rates, or show $50,000 toward your closing cost or whatever it may be, but really they're just moving money around and so, because they've done that, they've selected and created a specific box that you have to fit into to qualify for that amount, and if you don't, then you're going to have to go for these.
Speaker 2:You know higher loan programs and because their margins have been cut so much, typically their market rate is going to be a lot higher than a traditional mortgage company's market rate, because you know they're not operating on the same overhead okay, so shop, shopping around is probably not a bad thing, you know, it may be a good fit for you, like you said, you may walk in, you may be the person that fits in that box and then, hey, you, you want, like that's a good fit for you, but shopping around is probably not a bad idea. To talk to a few other people, oh yeah, absolutely so. If a buyer wants to use to a few other people, oh yeah, absolutely so. If a buyer wants to use their own lender, how do they compare with some of these offers?
Speaker 1:So if someone wants to use their own lender, they're adamant with it, but they also want to know if they're getting a good deal. What you want to do is request a loan estimate. Get a loan estimate from each competing lender so you can look at the numbers side by side and compare apples to apples. You don't want to have just a phone conversation and let someone tell you something over the phone and then take it to another lender to say, well, this is what they're offering me. You know it happens every day day. I see it every day and the reality is is the lender who's told you something over the phone may not have all the pieces to the puzzle, so they're operating on general information that you've provided.
Speaker 2:It's a ballpark quote from a home builder basically absolutely, and so then.
Speaker 1:But when brass tacks come down to it, when a loan estimate actually comes out, things have changed, because now they have all the pieces to the puzzle and now they're like this is what we can do. Get it from a competitor and look at them side by side, and that's how you will know what the best offer is for you okay.
Speaker 2:So getting into this next section, we got here this appraisal delays and like risk. Um, as far as, like the appraisals and stuff go, you know, maybe talk to us a little bit about that, how, how can people move through that smoothly?
Speaker 1:Yeah, so appraisals it's a third party company, it's not the lender that is doing the appraisal. We require an appraisal so we can set value to the house, to know how much we can live so why is it third party?
Speaker 1:just to keep from. You know malnicious intent. Keep it. Third party gets people from being biased in any kind of way. You'll want the Value to be fair and to the market standard. You don't want lenders manipulating the appraisal because Then, if you are, if your appraisal comes low, for example, then you know that's what the market supports. You don't want to have to keep an inflation of values going out and it being the only reason that they've inflated is to make a better loan term for you.
Speaker 2:I got you, I got you. So, as far as you know delays that people may run into during the loan process. What are some things that people shouldn't be surprised or worried about? Because I've worked in real estate selling stuff before and the moment there's a bump in the road, the client just completely freaks out. So what are some delays that not to be necessarily expected, but don't be scared of when they come?
Speaker 1:Absolutely not to be necessarily expected, but don't be scared of them when they come. Absolutely so the best analogy that we've used is getting a mortgage is almost like riding an airplane. Mortgage lender is going to be the pilot. You're going to just sit back, enjoy the ride. There's going to be turbulence. We can't guarantee that there's not going to be any turbulence right, there's going to be hiccups throughout the way.
Speaker 1:The best thing to do is be fully transparent with your mortgage lender and be ready for anything that could veer off and that could be just underwriting hurdles. You know you could lose your job, your car could break down. Then all of a sudden they're saying it's total and you need to go buy another car. Right, those kind of financial things can really derail a home buying process. But that's not to say that it is impossible, you know, being transparent with your loan officer to really figure out a plan forward. You know, if it means that closing is delayed, then let's know upfront.
Speaker 1:You know a couple of weeks or a couple of months in the process to know like, hey, this is what we're working on, and that way everyone has the right expectation right but if you know there's no transparency and that could go both ways if the loan officer is not being transparent to the home buyer about what's actually going on, then that causes frustrated frustration too. Being fully transparent all the way through that just will keep the process flowing as smooth as possible all right.
Speaker 2:So something I know that we've had clients design a house and see is you know appraisals coming in low, especially with you know trades being at kind of an all-time high because skill labor is at an all-time low and with you know products just you know wood and concrete and gravel and things like that being higher than normal, we're creating kind of a bubble where new builds that are being appraised using this market value approach against houses that were built back in 2005-2008 are not appraising. So what? What happens when you run into that?
Speaker 1:yeah, so there's a couple of ways that we can navigate that and it really depends on what the buyers limitations are. You know you could have someone who they're putting 50% down on their house and the house doesn't appraise. There's probably enough down payment and equity to work with. That we can renegotiate with the builder or the seller to bring down and match the value and move forward and we got no issues. But you know, if the uh buyer does not have extra money, if they put a minimum down payment down and it doesn't appraise, and our option is to well, you gotta pay the difference to make make up to the dip, to where the sales price is, then you know they may not have that option.
Speaker 1:And that's just gonna have to be a conversation with either the builder or the seller, like, do you have room in your margin to come down, meet us halfway? And if the answer is no there, then we really have to go back to the appraiser and do an appeal and just say you know, this is what the comps I am seeing and why it is this, and really put your case to the appraiser and try to get the appraised value adjust. You know, sometimes it works, sometimes it doesn't.
Speaker 2:So one of the things that I, you know, tell people all the time when they're coming in is we're all told, you know, live within your means and oftentimes construction is kind of pushing that envelope. You know, approaching construction, you really want to. You know if you're throwing a dart at a dartboard you don't want to have to hit the bullseye you want to hit the bullseye, but you don't want that to be the requirement. Absolutely Just hitting the board is the requirement, so you've got some margin to operate with your budget and stuff absolutely.
Speaker 1:You don't want to be at the very top of your budget building because there are things that can change. You know prices go up, appraisals fall short. You may decide that change orders are needed. I know we've talked about on other episodes before that. You know you may run into grading or foundation changes that you didn't even anticipate and it's not a want that you wanted to change, but it's a requirement to build and that may change the overall cost of the house. So having that budget kind of in mind and that buffer is very important, right?
Speaker 2:if if a four hundred thousand dollar house is max your budget, because your max payment's eighteen hundred dollars a month and that's what that was going to be. And then all of a sudden, you need a rock hammer on site and it's going to go to 410 and make your and make your payment $1,890 a month and you can't afford that you should never have been looking at a $400,000 bill in the first place. No, no, right. But often people come in and go. I can make it fit and it's just a gambling game.
Speaker 2:You're really rolling the dice on stuff like that. So if construction's delayed on a project, if you get out there, and you run into weather, maybe one of the tradesmen got sick. Just stuff happens in construction, like anything else, because it's a I mean it's a year-long process a lot of things happen in a year and there's a lot of moving parts? Yeah, tons of them. So if you give them a loan for 12 months and all of a sudden it's going to be a 14-month build, what happens?
Speaker 1:So it's always an option to extend the loan terms negotiate. Say, the construction loan is for 12 months and it's going to be 14 months, Then that is the builder and the buyer working with the finance company to decide. Can we renegotiate that term?
Speaker 1:It's going to be longer Most of the time. Yes, where we run into a lot is especially in this market is rate locks. You know people are wanting to lock in a rate because they're just uncertain with what the market's going to do, and so having those what's called extended rate locks, where we're locking for 120 to 360 days on a lock term Um, we really look after those, especially with delays too. So I always like to work with my buyers and educate them like we do have those options available. But if our 120 day lock is going to be ending like at the proposed construction completion time and ground hasn't even broken yet, then that's probably not the smartest move. There's going to be delays, we have to expect for, like you said, plan for delays.
Speaker 1:We don't want to just cut it short, and typically on those longer locks there's also going to be premiums on it. So if the market right now is at six and a half and we're going to do an extended rate lock, we're probably going to be looking at 675 6875 on that extended rate lock. Most of them will have what's called a one-time float down on it and so it's locked in at six, eight, seven, five for 120 days.
Speaker 1:Your house is done, we're about to move in and then the market's improved, so you want to look at floating it down and yeah we can float it down, but that premium that was attached on there is still going to be attached so if the market was at 6.5 when we locked it, but you locked at 6.875 and now it's dropped to 6%. You're going to be at a 6.375 interest rate on a float down, and you know, that's just kind of how the programs work.
Speaker 2:But we can always refinance.
Speaker 1:You can always wait if you think the market is coming down, and lock at a 30-day lock, 45-day lock, and avoid those premiums.
Speaker 2:The interest rate that you're mentioning, you know, made me think of something the interest rate on a construction loan versus permanent financing mm-hmm are they the same?
Speaker 1:it depends, okay, is the short answer typically no, no. But it is gonna depend on who you finance with. If it's a bank or mortgage company, shop around. Some of them may have the same interest rate throughout. I have a one-time and a two-time closed loan. Neither of those options have the same interest rate for one or the other. So your construction period is typically an interest-only balloon payment. It's going to be a right now, a higher interest rate than where the market's at.
Speaker 2:Right.
Speaker 1:But you're paying interest-only on the amount of money that is used, not for the amount of money that you're approved for up front.
Speaker 2:Just whatever you're pulling out of the time so the payments grow over the time frame.
Speaker 1:So it kind of works like a credit card. You may have a credit card with a $5,000 limit. If you're not using it, you're not paying interest on anything. If you use it and charge $100, and you're paying interest on $100, not $5,000. It's the same way the construction loan is going to work.
Speaker 2:Okay.
Speaker 1:And then once it converts to a permanent mortgage, whether it's the one-time or two-time close, the one-time will automatically convert. The two-time close we would have to refinance. You're locking in whatever that interest rate is for the one-time close up front, based on where the market's at the two-time close. You are waiting until the home is done and then locking in that interest rate of that. So a two-time close.
Speaker 2:If you thought the market was gonna drop in the next 12 months based on the political climate or whatever, it may be a good to do a two-time close because you're gonna hit that on the back end and grab that lower interest rate absolutely and he thought it was go up shooting for the one time may be what you want to do.
Speaker 1:Yeah, okay, so it just really depends on your circumstance and situation.
Speaker 2:Gotcha. So you know what are. I guess what's one thing buyers can do to prepare before they go talk to a builder do to prepare before they go talk to a builder. What are they, what can they do?
Speaker 1:talking to you as a loan officer to kind of get everything in order. Yeah, uh, first and foremost, what every lender is going to say you need to get pre-approved. You need to have a ballpark budget in mind. You need to have a conversation with a lender and talk about the realistic expectations. How much money do you have, how much are you willing to come out of pocket and what do you want your monthly payment to be? Think about those things, have a discussion with your lender and find out what your options are based on those questions. Get pre-approved and then you can confidently go speak to a builder, go design your home and know what your budget is and what you're walking into, and know if you have a leeway to increase or if you have a drop dead line of like. Not this, this is what I need to build this house for right.
Speaker 2:so this is why I think it's super important to have a very knowledgeable lender is because when you're talking to them and you're getting you get pre-approved right, you get going on that Everybody knows how to get you pre-approved and then, once you're starting down that path, they know your situation. If you're being open and honest with them, they can go. Hey, listen, I know we were looking at VA finance and I know we were looking at doing zero money at the table, but there's this loan product over here. We may be able to get your monthly payment. I know you've got 5% that you could put down we talked about. Maybe that's a better option. They'll work with you to get those things accomplished and help you be at the end result you want to be. If you could just give home buyers like one piece call it the golden nugget that you give them, what would that be?
Speaker 1:so I would say you know, don't max out your budget. Um, if you have, if you have a price in mind, then you need to be able to have some reserves. You need to have some of that buffer room in there. So when things do happen throughout the process, if there are delays, if there are unexpected costs, you haven't just derailed the whole process and you can't buy your house now okay.
Speaker 2:Well, guys, that's it for today's episode of constructive conversations. We hope you feel a little more confident about what it takes to finance a new construction home. Big thanks to Zach for sharing his expertise with us today and bringing down a complicated process in a way that actually makes sense. If you enjoyed this episode, be sure to subscribe so you don't miss future conversations about new construction. And if you know someone who's thinking about building a home, send this episode their way so it could save them some time, money and a lot of stress. Contact Zach, check out their website it's at Victorian Finance Next time we're going to discuss how working with a real estate agent is beneficial during the new construction process. Thanks and see you next time. See ya.
Speaker 1:What'd y'all think about that one?
