Construction Blogging: Budget and Finance

As you may have guessed from my first post, we didn't enter into the decision to build the house without much deliberation.  Buying or building a house involves a huge amount of money, regardless of how grand the house is.  I mean, $60,000 or $600,000, I'd have serious reservations about spending the money.  So we made it clear to our contractor that his budget for this project had to be on point.  There's a maximum amount of money that we're comfortable borrowing, and the VERY ACCURATE construction budget had to be within that amount before we would move forward.  Once the borrowed money runs out, that's it.  There's no more money that will magically appear to pay for a bunch of overbudget stuff.  So, our builder prepared a very conservative budget (hopefully so conservative that we will actually end up under budget, but I'm not naïve enough to believe that will happen.  It was under our "magic number," so we decided to move forward.  Slowly.

 

The first step was to actually shop all of our allowance items to verify that we could stay within the allowance portion of our budget.  I can hold our contractor to a lot of things on his end, but it's not necessarily his fault if I exceed the allowances he gave me (assuming the allowances are reasonable).  So I spent TONS of time picking out flooring, appliances, plumbing fixtures, light fixtures, etc., BEFORE we even started working on financing.  I thought that would put me ahead of the game once we actually got started, but as I'm finding out every day, I don't think there is such a thing as being ahead of the game when you're building a house.  

 

The financing process started out fine but then turned toward the ridiculous as we got closer to closing. We decided to go with a construction-to-permanent loan from BB&T.  With a typical construction loan, you close on the loan, build your house, and then have to have a second closing for your "permanent" financing after the house is built.  So you end up paying closing costs twice.  With the construction-to-permanent loan, you don't have two separate loans.  You have one loan that you "modify" from construction to permanent financing when the house is built.  So you don't get hit twice with closing costs, which is nice.

 

Underwriting for construction financing is a bit more strict than underwriting for a conventional mortgage, mainly because the bank is taking a bigger risk because the house that will eventually secure the loan is not in existence when the loan is made.  Our credit is good, and we had already spent months (years, even!) getting comfortable that our income was sufficient to support this loan payment, so we weren't really worried about that part.  The worrisome part was that, as with most traditional loans, the bank will only loan up to 80% of the property's value (or the estimated value that the property will have once the house is built).  If your construction costs exceed that amount, you have to make a "down payment" by using your own funds to pay that excess before the bank will disburse any funds.  Because we have put so much money into the property already (between buying the property, building the garage, demolishing the original house and boathouse, and building the new boathouse), we weren't willing to add any more of our own cash to the deal up front.  In the beginning, we were very confident that our construction costs wouldn't exceed 80% of the property's value because, I mean, we HAVE put so much money into the property already and should have a huge amount of equity in it. When I was checking with different banks about financing, however, one loan officer I spoke to told me that, for the past couple of years, he has NEVER seen an appraisal come back high enough that the borrower didn't have to put additional money in, even when the borrower owned the land outright.  That is supposedly because it costs more to build a house than to buy an existing house right now, which means that the appraisal of what you could sell the house for would be less than the cost to actually build it.  

 

But, in addition to all of the planning, shopping, etc., that went into our decision to proceed, I also prayed about it.  A lot.  My prayer was that, if all of our calculations are wrong and we really can't afford to build this house (or if something is coming down the pike that would cause one of us to lose our job and not be able to afford the house in the future), God would throw a roadblock in our path to stop us.  So if the appraisal came back too low, I was prepared to accept that as a sign that we should just put this off for another couple of years.  I would've been disappointed, but what else can you do at that point?   Imagine my shock when the appraisal came back WAY HIGHER than we needed.  Okay, God, I get it.  Stop talking and start acting. 

So everything progressed wonderfully with the loan until the week before we were (supposedly) going to close.  Then, while Ben and I were on our trip to Ole Miss in October, I got a call from our loan officer saying that the construction loan administrator didn't like our contract with our builder and that we needed to make some changes to it.  First, let me say that I provided VOLUMES of information to the bank in connection with this loan application and, for the most part, all of that information (builder contract, builder profile, builder credit references, plans and specs, etc.) was provided when we initially applied for the loan in August.  So, the week before closing, they finally decide to read the builder contract?  Unbelievable.  

What they didn't like about the contract was that it said the budget the builder provided to us was an "estimate" of construction costs.  The bank wanted a "fixed cost."  Well, no builder in his right mind is going to agree to build on a "fixed cost" basis unless he makes the fixed cost a good 25% higher than it should be just to cover the risk of things going overbudget.  After going back and forth with the bank on this, they agreed that I could change the language to say that "Building costs are $X but are subject to change based on increases in the prices of materials, acts of nature, or other things outside Builder's control."  So, basically, I took 26 words to say that building costs were estimated to be $X.  The bank didn't like the word "estimate," but they didn't mind me taking two lines of text to say "estimate" in more words.  I'm the contract lawyer, people.  Just let me do my freaking job.  

In the end, everything fell into place, and we finally ended up closing the loan on November 5.  Everything has been a whirlwind since then.  I promise the next post will have some pictures of the progress.  :-)