- I have to pay off my lot before I get a construction
loan.
- I should pay for everything myself first, and then
get my loan.
#1 and #2 are the most common misconceptions in building
today. Many borrowers expend all their savings on their
land and then their plans and permits, leaving themselves
cash poor. Lot financing is available with small down payments
because you need cash reserves to qualify and to run a home-building
project. Also, with many lenders, once you put cash into
a project, you can't get it back out until a year after
it is built. Borrowers in this position often have trouble
getting a loan due to poor liquidity. Stratford will analyze
your liquidity and set a plan ensuring flexibility and qualification.
- I should get my lot, plans and builder before I start
worrying about the construction financing.
How can you determine what and if you should build without
understanding the financial impact?! Unless you are going
to build your project completely from your own savings,
you will rely on funds from a lending institution. These
lenders live by “The Golden Rule:” Them that
has the gold makes the rules! Many consumers plan their
whole project before consulting a construction lender. They
invest years of time and thousands of dollars, only to discover
they made vital mistakes along the way, restricting the
financing of their project or stopping it altogether. Your
Stratford Financial Loan Officer will help you to understand
what lenders look for in a project and how it will be structured
financially. Stratford works years in advance with clients
who are just thinking about building a home. Time is an
ally in building a Dreamhome. Stratford will help you engineer
your finances for optimum benefit. We’ll help tailor
your financial picture to meet the lender’s guidelines,
ensuring your qualification for the best construction loan
programs.
- I should buy my lot, and then decide what to build.
One of the major factors in lender guidelines relates to
the appraisal of the finished property. The lender evaluates
the property for market value and conformity with houses
in the neighborhood. In order to determine fair value for
a lot, you need to make sure that your Dreamhome is consistent
in size and quality with houses in the neighborhood. Overbuilding
or underbuilding for a neighborhood can cost you cash and
equity. The fair value for a lot can only be determined
within the context of a finished home. Many borrowers have
purchased lots for what they thought was a great price,
only to find out that the home they wanted will require
significantly more cash than they have available. Stratford
will research a neighborhood to determine the potential
appraised value and optimal building size and amenities.
We will work with you during the design process to continually
make sure you are getting the best value and financing opportunities.
- I can start with a small construction loan at the beginning
and just finish the project out of savings as I go. I should
borrow as little money as I can get away with.
There are many factors to consider when determining the
right loan amount. Many people consider their home loan
separately from the rest of their finances. A Dreamhome
is likely to be your biggest single asset, your biggest
single liability and your best resource for tax deduction.
The loan payment will either insure or disrupt your ability
to sleep at night. The size of your permanent loan should
be determined within the context of your entire financial
picture.
While the permanent loan size is a factor in financing
your Dreamhome, it is less important than the financial
structure of the build itself. Between savings and the loan,
you must have enough money to cover the entire cost of the
project plus any overages. The lender will require that
all of this money is accounted for on the day you start
the construction loan.
More than 25% of building projects run over budget, some
by as much as 30%. It is better to account for more than
you think you need since you can always convert to a smaller
permanent loan. If you run out of money, you can expect
to pay high fees for additional cash, if it’s available
at all. If no financial solution can be found, your project
will fall to foreclosure. Stratford will help you understand
your financial needs for the beginning, middle and end of
your project. We will make sure that you are aware of all
the potential financial pitfalls and remedies for successfully
completing a Dreamhome. The financial decisions you make
will be educated decisions based upon facts and experience.
- Construction loans are just like any other home loan.
The best loan has the cheapest rate and fee.
When you purchase or refinance a home the process is over
when the loan funds. With a construction loan it is only
the beginning. The success of your project will depend on
how well the 6 – 12 month disbursement procedures
are compatible with your finances and your builder’s
style. A problem in this area could cost you months, thousands
of dollars, maybe even your project. The variables in qualifying
for a construction loan are ten times that of purchases
and refinances. For example, you may choose a loan that
has a lower rate, but because of the “Loan to Cost”
requirement it may cost you $100,000 in savings.
Lack of borrower information and poor packaging by brokers
are the reasons that most construction lenders deny more
than 40% of construction loan requests. Many lenders and
brokers dabble in construction, but have not processed enough
construction loans to understand the intricacies. Stratford
Financial is a specialist in construction financing. We
finance hundreds of successful Dreamhome projects every
year. Stratford’s 100% approval rate is a product
of our integration of loan programs with your financial
needs and the needs of your builder. We will account for
rate, fee, qualification, builder methods, cash flow, timing
and many other factors. You will be educated as to your
choices at every step.
- I have to sell my home and rent before I can start
building my new home.
Stratford works with many investors who don’t consider
your existing home in qualifying for your new home. This
coupled with low rate refinances and credit lines for accessing
liquidity means you will only have to experience the inconvenience
of moving when your Dreamhome is complete.
- My house will be worth what it cost me to build it.
Most people have never experienced the home building process.
There are more than 100 different checks to be written for
various products and services before you move in. Many of
these expenses are hidden or sneak up on you during the
process causing projects to go over budget more than 25%
of the time. No lending institution will judge the value
of the property based solely on how much money you put into
your project. They will account for the money that you have
contributed, but the weight of their lending decision will
be made on the appraised market value. Stratford Financial
will help you establish a budget at the very beginning,
taking into account the market value in your area. We will
educate you on what questions to ask in order to flush out
any hidden costs in your process.
- The construction loan will pay for everything along
the way, so I don't need to use my savings.
There are two basic types of pay systems in a construction
loan. The “voucher system” gives you money based
on work you are about to do. This system has almost disappeared
from today’s financing landscape. Almost all construction
lenders have now moved to a “draw reimbursement system”.
This system reimburses you for work that you have already
completed and/or monies you have already paid. This means
that you have to pay for the work before the lender will
give you any funds.
There are other factors that can affect your cash flow
during the project such as your builder’s ability
to carry debt on materials or the need of your subcontractors
to be paid on a weekly basis instead of at the time of your
monthly draw. Deposits on items such as windows and doors
may need to be paid in advance and many lenders will not
reimburse these costs until the items have been installed.
Most soft costs are reimbursed on a paid receipt only basis,
requiring you to complete payment before drawing funds from
the loan. Stratford Financial will do a full cash flow analysis
of your project determining the amount of working capital
you need along the way. To ensure a smooth project we will
use our resources for refinances and equity lines to alleviate
any cash flow short falls.
- There is no single resource for all the information
I need to build my Dreamhome.
Throughout this project you’re going to have to navigate
your way through a process that you probably know something
about but have never done before. You are going to deal
with a Realtor, developer, land owner, designer, architect,
soils person, engineer, design review, city, county, builder,
contractor, several sub-contractors, landscaper, and many,
many more entities.
Many of these people are going to talk to you about soft
costs, dollars per square foot, contingencies, etc. All
of the information that you’re going to get will be
different, and most likely correct, depending on who you’re
talking to and their perspective of your project. There
are only two parties in this transaction that have to account
for every dollar and every detail, you and the company who
is financing your project. Let Stratford benefit you with
its experience of financially engineering hundreds of these
projects successfully.
