The Hard Part of the Dream
If you dream about building your own home, clip and save this tale. It may help prepare you for the surprises and frustrations you will face.
After 20 years, my husband and I wanted to move from our cramped condo to a “real” home with a view, a yard for our dogs, a home office and plenty of room to display the treasures from our travels.
We rationalized that by building, we would get exactly what we wanted. So, excitedly, we embarked on the path to making our dream come true on a spectacular view lot in Playa del Rey.
Though designing “Playa del Huff” was a learning experience filled with daily surprises, it wasn’t nearly as challenging as getting the loan to build our dream home.
Arranging a construction loan requires patience, perseverance, tolerance for frustration and a “beating the odds” personality. But our sense of humor and ability to laugh at ourselves kept us sane.
Despite a few costly mistakes, we had fun and learned some important lessons, which we hope can help you:
* Choosing the right lender.
Because the lender becomes your partner in the building project, you must choose carefully. This can be difficult as there are so many choices. Even savvy shoppers can be overwhelmed and confused by the variety of financing options available--regional savings and loans, direct lenders, loan brokers and even online lenders. Comparison shopping is usually a good strategy, but the variables in construction loans make this nearly impossible.
After extensive research, some shopping around and recommendations from friends, we decided on a direct lender, based in Southern California.
Naively, we believed the company’s ads touting an easy process, approval in minutes, locked-in rates and, best of all, virtually no documentation. Though such claims may be true for traditional home loans, they certainly weren’t true for our construction financing, which took nearly nine months to arrange.
Building a house is a long and complex process, so a face-to-face relationship with a lender is essential. We recommend starting with your own bank. If it doesn’t handle construction financing, ask for referrals. Or drive around and look for signs on nearby remodels or new construction sites. Most banks specializing in construction financing post signs on projects in the works.
We learned the hard way that the key benefit of using a local bank is its knowledge of the neighborhood, which is critical to getting a fair appraisal.
* Importance of the appraisal.
As we later found out, the appraisal can make or break your deal. Some appraisers tend to be overly conservative, and this can significantly affect the loan amount and upfront cash required.
Many applicants know little about getting a loan, so the lender takes the lead. But to protect yourself and to make sure you are getting a fair deal, it’s important for you to take charge of the process.
Unfortunately, our lender-appointed appraiser wasn’t familiar with our neighborhood and came in low with the appraisal. He was also subjective about opinions he expressed regarding the location, view and estimated future value of our house.
This created a big problem for us, requiring a much larger down payment, which we couldn’t afford. If we hadn’t come up with a solution quickly, our dream would have rapidly turned into a nightmare.
After nearly wearing out our worry beads, we came up with a two-pronged approach. First, we provided the lender with additional documentation, such as new listings and recent sales of neighboring homes, and requested a recalculation of the appraised value.
Then, to lower costs, we went through each item in the construction bid and eliminated everything that was not absolutely essential.
Some amenities, like the elevator, were difficult to give up. Yet we had no choice. If it had been solely up to me, I would have saved on the foundation and framing, but our contractor insisted that wasn’t an option.
We didn’t know it, but we could have recommended an appraiser to our lender, which would have saved us most of these headaches.
Ask a local Realtor for qualified appraisers who are familiar with the neighborhood and submit their names to your lender as soon as you can. Unless they have a reputation for having done questionable appraisals in the past, most lenders will agree to use them. This will give you the best chance for getting a fair appraisal and approval of your loan.
* Estimating how much it costs.
You must have a good idea of how much it will actually cost to build your home. First-time builders tend to underestimate the total price. Our friends scared us with horror stories about people who started homes but couldn’t afford to finish building. And we certainly didn’t want that to happen.
Establishing a realistic budget in the beginning of the loan process is one of the smartest things you can do. We quickly found out that all those “little” costs quickly add up to big numbers.
To get a rough idea of costs, add the price of the land, expenses you incurred, (such as architectural fees, engineering and soils reports) and the construction bid.
Now add loan fees, closing costs, a contingency account (for unexpected cost overruns) and interest on the money you are borrowing during the construction phase. This gives you a grand total, which can be frightening.
Your down payment is the difference between the maximum loan amount and the total cost of the project. Lenders generally require you to have at least 25% equity in new construction.
To help you with budgeting, get a good-faith estimate from the lender as soon as you can. It’s required by law and gives you a preliminary breakdown of many costs and expenses, some of which you may not have anticipated. We waited too long to ask for this and got a few surprises.
As part of the loan approval process, the lender carefully evaluates your house plans and analyzes your construction costs. This is to make sure that your contractor’s bid is realistic, appropriate for the type of house you’re building and suitable for the neighborhood.
Be prepared to explain your costs to the lender or have your contractor available to do this.
* Documentation and timing.
Even for a low-documentation loan, (which means you provide just a little less than everything in your entire credit history), we were stunned by the amount of paperwork required.
But what really shocked us was how many times we had to resubmit the same items. Some delays were our fault, as when our designer made a big, costly mistake and we had to redesign the house completely, which took several months to resolve.
When that happened, it nearly derailed our plans and we seriously doubted our ability to go ahead with building our house. After agonizing over it for weeks and doubting our original decision to build, we decided that perseverance was the answer.
Our lender caused many other delays. On countless occasions, we were told loan approval was imminent. Then, just before we started to celebrate, we would get the dreaded “send more paperwork” call.
Our frustration level rose when we discovered that financial documentation has a short shelf life--about 60 days. Beyond that, it’s almost like starting over. Be prepared to resubmit everything: bank statements, investment account balances and pay stubs.
Proving income was complicated because my husband is self-employed, which meant providing several tax returns, 1099 forms, profit and loss statements and income property verification, and doing it not once but many times.
Who would have guessed that documents expire? But had we asked the right questions from the beginning, the process could have been a lot smoother and much less stressful. Always ask the lender what documentation is required (every case is a little different), when it’s due, how long it’s valid, what the loan timeline is and when the loan is expected to close.
* Write everything down.
Most important of all, take copious notes and keep copies of everything you turn in. This comes in handy when discrepancies arise.
Though it may sound a bit Type A compulsive, we maintained a chronological record of everything right from the beginning. Our third binder is almost full, and we plan to continue until we’re ready for the open house. It already saved us money on several occasions and cleared up potential misunderstandings with our lender.
Throughout this lengthy loan process, one of the most important relationships we established was with our general contractor, Big Chief Development. It was like having new best friends. We talked daily. The company stood by us during the long delays, helped us cut costs on more than one occasion and actually kept us from giving up when we were really frustrated and felt like quitting. Often, we ask each other, “Do you think we can build this house, maintain our sanity and still stay married?”
So far, we’ve had countless crazed moments, high levels of frustration and lots of ups and downs. But, we learned to be (a little) more patient, manage our expectations and accept that building a house is not easy, yet it can and should be enjoyed along the way.
We go out to visit the “Playa del Huff” construction site nearly every day. As we see the house taking shape, we’re still amazed that our dream is becoming a reality and we’re glad we overcame the obstacles and persevered.
Soon we’ll be relaxing on our deck, enjoying our new home and marveling at the spectacular beauty of our breathtaking view.
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Agnes Huff is a Los Angeles freelance writer and owns her own public relations and communications company.
