Get a Loan to Build Your Dream Home

All right, so construction loans. So now you've got this land, you've either inherited it or you've purchased it, right? So I wanted to go through a couple of things. Now, when you buy the land, again, like we mentioned before, you've got to put and plan to put 20% down. There are no 0% down land loans, there just are not. So if you're a buyer that's a low down payment buyer, you need to be cautious and be aware that this will be a cost. There's also closing costs for that land loan as well. So you've got down payment plus closing costs, but let's say now you've got the land. So if you inherit it, you have no seller to worry about. You can take your time, you can get plans, find a builder. That's just a whole other exercise, y'all. You've got to find a builder. Does the builder have plans already? Some builders have four or five sets of plans that you can just choose from and then they can make some modifications. If you're really wanting a super custom home, be prepared, plans like that cost money. And architects, usually I don't think I've ever seen a set of plans from beginning to end from scratch. I don't think in less than three, four months, because there's a lot of back and forth, right? You're building the home of your dreams. So you need to understand it takes time to get the plans and the measurements. And like we talked about with Jordan, like where are the easements? Where can we build? Where's this? Is there a pond over here? And where on the acreage? So all this back and forth takes time. So when you're purchasing the land, the seller wants his money. He's not going to wait around for you to get your loan approved over here. They don't really care. So that's the first lesson after many, many years of heartache that I will tell you is that be prepared to buy the land and have it for a little bit while you're getting all of your other ducks in a row, okay? That's number one. The next thing is what kind of loan are you going to get? So conventional loans are loans that you could do on construction. You can do as little as 5% down. FHA is 3.5% down. So these are entry points to construction with very little down payment. Now be aware that construction loans do not allow down payment assistance. So if you're a buyer that's looking for down payment assistance, land and construction is not for you. You've got to have money in the game. You've got to have skin in the game. You've got to have these down payments and closing costs. VA also does construction with 0% down. So there are products out there where we can finance a very large amount of what you're doing, but you've got to have that land. So if you purchase the land and whatever down payment you had at that time, remember we talked about 20% with Jordan, that 20% is going to credit towards your loan amount. So we're actually going to go through an example of that here before we get into like builder and the construction part of it, okay? I do have a question that I'm going to answer. So Stefan, thank you so much for tuning in. Some builders like ourselves, okay, Stefan must be a builder, will do a lot of valuation before you buy. Oh, Stefan, that's amazing. So Stefan is joining us on LinkedIn. So go check him out, Stefan Manani. And that's awesome to know. So yeah, there's different builders that do different things. And so when you are building, it's really important to see who's building in your local area because builders really can accommodate. And like Stefan said, and thank you for contributing that Stefan, builders will help you do a lot of evaluation before you buy. So I mean, wouldn't it be horrible to purchase a lot and then you find out later that you can't do what you wanted to do with it. That's like the ultimate horrible, horrible, horrible. So we're going to put up a slide right now and I'm going to go through some numbers because this math can be hard to understand, okay? So first we're going to talk about, so let's say in this example that you purchased the lot for $100,000. Now I realize there are lots less than that, but let's just say $100,000. 20% down is $20,000. So that means that you finance 80,000, 80K on the lot. You put down 20, you finance 80. Now let's say, let's say you go build your house with Stefan. Let's say the cost to build the house is 300,000 in addition to the lot, okay? So now the new cost, the lender is going to look at it this way. Lot's worth 100,000, 300,000 is the cost to build. So now our new adjusted price is 400,000, okay? Lot plus construction. So now let's calculate a little bit your down payment. So first it's important to know that when we do the appraisal, we're going to take the plans. Stefan, you're just our builder for this example, okay? We're going to take those plans from Stefan. You've worked with him on the plans. Let's say he had six plans for you to choose from. You chose one, made some modifications. You're ready to go. We're going to do an appraisal subject to the inspection, subject to the completion, okay? We're just going to pretend that we're seven, eight, nine months ahead. And we're going to say, this is what it's valued at. Now it needs to be at least 400,000 in this example for us to do the math that I'm about to do, okay? So the next slide we're going to look at. So remember we're at 400,000 of actual cost. So let's say that you want to do an FHA loan. Let's say that you're a buyer that, and FHA loans, guys, I'm actually going to share some videos in the comments that I've got on exactly what's an FHA loan. But if you're a lower credit buyer, you have a higher debt to income ratio, FHA loans are perfect. You just have to watch out that they have loan limits in every state. Most, and it changes every year. So right now at the time I'm making this, the loan limit is, you know, 498 and some change. So anything above that is not an FHA loan. But let's just say, for example, in this case, of course, this $400,000 example, that's definitely an FHA loan. So remember our cost basis of lot plus construction is 400,000. So let's say I'm going to finance, we're going to do a 5% down, 95% loan. That's 380 that you need to finance. So you need to have 5% equity. That means we're going to finance up to 380. But wait, we have a lot loan that we did for 80,000, remember? So we're now going to subtract that lot loan because we're going to pay, let's say Jordan did the lot loan. We're going to pay Jordan and Pinnacle off because we just want everything wrapped up into one. We're going to say, hey, here's your 80,000. And now we have $300,000 left. That is coincidentally Stefan's price to build this house. Let's say in our example, you've got 300,000. So basically you're probably thinking, oh, I'm able to finance a hundred percent because you can get me a $300,000 loan. And that's actually what I owe the builder. The answer is yes, but no. So there's something really important that most people don't know about construction. And what that is, is that there's closing costs. So in this example, yes, we can finance all of Stefan. However, there's something that we also allow for called contingency. So yes, it costs 300,000 to build, but we're going to pad it a little bit. We're going to want to pad it because things sometimes cost more money or you want to exchange and, oh, I want that upgraded tile. Or, you know what? I do want that bathtub with the claws on it. Or, you know what? I want Travertine instead of this Formica over here. So there are things that happen in construction. You know, you're with a builder for seven, eight, nine months usually, when you'd custom build. So there's cost overruns. There's different things that happen. So we allow for that. Plus there's closing costs. So closing costs are going to be out of pocket as well. There is an exception to that. Especially if you inherited the land or have had it for a while, maybe you bought it years ago and that value has been increasing and you bought it for 100,000 years ago, but now it's worth like 150. So whatever that math is that we visited a couple of slides ago, when we take the lot value plus the construction and we make sure there's enough to pay the builders, sometimes you can roll in those closing costs, y'all. Sometimes you can. So I could go through 100 scenarios on here, but I think the point I wanna make is that it is possible to get in with little down and possibly no down, depending on how long you've had that lot and if it's gone up in value, and that's your equity, okay? So you might not have to have any money out of pocket, but it's important to understand. So the next part, you've got your builder, you've chosen Stephan to build your house, you've got your plans, you've gotta make sure you talk to the construction lender. So it might be someone like Pinnacle, maybe the people you did the lot loan through, they're gonna do your construction loan as well, and maybe not. Sometimes people come to someone like me and they say, Jen, okay, we've got our plan specs, everything's set, the builder, we need to approve the builder. So we would get financials from Stephan, we would check everything out, everything's great. That usually takes about a week. And then we work with the builder on things called draw schedules, we need to make sure we know when you need money, he's gonna give us a plan, very detailed plan, so the lender and the builder work together so that we know, hey, every month, they're gonna take 50,000, et cetera, et cetera, and that's gonna pay for the foundation and lighting and there's advancement in the process, right? So we go through all that, and usually from the time that you have the plans ready with the builder, construction usually can start within about 45 days, I would say, because we get the appraisal and sometimes quicker, it just depends. So then you're on your way and you're building this house over this period of time. Now, there are times, again, depending on how much equity that you had, that you can, the loan is increasing. So in the first example that we had, we had this lot loan of 80,000, the lot loan is gonna be paid off when we do the construction loan and we're gonna add to that 80,000. In our example, every time the builder, every time Stefan takes, every time he takes a draw, it's adding and the loan becomes 100,000 and then 150 and then 125 and it keeps growing, right? Well, there's payments that are due on that loan throughout the process. And so usually construction loans are interest only, so it keeps it to a minimum to some degree, but you need to be prepared as well to have some money behind the scenes because while your house is being built, you need to live somewhere, right? So I'm sure you have your current house or that you're renting or owning, you've got that payment and then you've got the payment on the construction as well. So there are some types of loans, you might be able to roll those costs in for the payment, but that gets really, really granular. It's gonna depend on which loan you qualify for, how much equities in the house. So I just wanna assume the worst case scenario that you need to plan ahead and say, oh, I need to pay for the next seven to nine months while I'm under construction, my payment on this construction loan is going to be advancing and it's going to be increasing. And then at the end of that term, you're going, let's say the house is finished, you're done, let's say it's been nine months, you're gonna, then we're gonna, the lender's gonna recalculate the loan and go into your nice, beautiful 30 year fixed loan. So that's how it works.