Submitting Your Financial DNA
Read Part One: Choose Your Financial Instrument
It takes more than a downpayment – and that probably entails 20 percent of your project price – to obtain financing on a custom-built home and the land upon which it’s erected.
This is not likely this is your first home loan, but probably it’s the largest and thus destined to be the most heavily scrutinized.
Document up!
In order to gauge loan worthiness, lenders require extensive proof of income(s) and asset verification. Be ready to submit the following:
- Two to six months of pay stubs
- Two years of W-2 forms
- Two years of tax returns
- Two to six months of bank statements
- Contact information of your employer(s)
- Documentation of any other sources of income, such as rent collections, royalties, pensions, Social Security, or disability payments
- Your debt information with relevant documents
If you haven’t been monitoring your credit score, it would be a good idea to check prior to any loan application. The reporting agencies can make mistakes. Although you may have your own way of checking, CheckFreeScore-dotcom will gather reports from Experian, Equifax, and Transunion, the major reporting agencies.
Set Aside Cash Reserves
Do you have the cash required for the downpayment or if you don’t have it right now, will you have it at the time of closing?
That’s the first question, but not the last.
Most banks or mortgage brokers (hereafter referred to as bank for simplicity) will want to make sure that you have at least six months of cash reserves. This calculation entails whatever your monthly mortgage is going to be times six. You’ll need proof of cash on hand so that the mortgage is covered even if your income stops.
Open a Checking Account
Banks have different application requirements, but many will insist you open a checking account if you’re not already a customer. This may be a way of obtaining extra business or a sneaky means of collecting your driver’s license and social security number.
Choose a Qualified Builder
The bank has a vested interest in who you choose to build your custom home. They are lending on the presumption that the builder will deliver on their contractual obligation in a timely manner.
The bank will examine the building plans and specs. They’ll review your selections of countertops, lighting fixtures, siding, materials and every ingredient.
They’ll need the building schedule and the percentage draw to which the builder is entitled upon reaching each milestone.
A good builder provides plans that meets the bank’s criteria, and faithfully fulfills its obligations.
Ascertain the Appraisal
There isn’t anything you can do to prepare for an appraisal, except be aware that:
- an appraisal is going to take place
- if your home design plan doesn’t appraise satisfactorily, file an appeal.
New custom construction is difficult to appraise, so don’t be alarmed if a problem arises. People rarely build a custom home and then turn around and sell it within a year or two. For that reason, and since in all likelihood there are no identical houses, seldom are there valid comparisons from which to determine a value.
If your appraisal falls short, the first thing you should check is to make sure the appraiser accounted for every item and component of the building plan. It’s quite possible they missed something or shortchanged the value of something. See what they used for comps and make your own comparison.
Document carefully everything before filing your appeal.
Shop for Builders Risk Insurance
One more expense and you can’t build without it.
Builders risk insurance mitigates construction site catastrophes, natural disasters, and vandalism. In Georgia, builders risk insurance is usually required as a condition to comply with government regulations or meet contractual arrangements.
This insurance covers buildings, equipment breakdowns, general liability and more during the construction process.
It’s obvious why this type of coverage is important to your lender.
Rates vary, so shop around.
Know Your Loan Options
A previous email discussed the types of loans available for new construction. If you missed it or would like to review, click here.
Once your financing is set, it’s time to concentrate on what made this tedious process worthwhile – bringing the vision of your new home into reality.