So my wife and I are inching closer and closer to our goal of building a home soon but I ran across a startling piece of information that could potentially end the process – post-construction appraisal. Admittedly, I am a noob as far as the whole loan process goes (learning more as time goes on though), and didn’t realize until recently how significant the final appraisal was in solidifying the loan terms. For some silly reason I thought the amount of money borrowed for construction was simply converted to the loan amount and that was that.
As I now understand it, there is a pre-construction appraisal which occurs prior to the loan being approved which gives a rough idea as to how feasible the house is for the given area. Once the bank deems the proposed property value sufficient for the loan amount they approve the loan (assuming everything else checks out). The part that is keeping me up at night right now is the possibility of the final appraisal (after the home has been built and money spent) coming in way under the cost to build. I read a lot of horror stories online of people getting burned, but not a lot of positive stories. Anyone care to share their experiences?
I have an appointment to talk to the bank next week to get some clarification but wanted to get some real feedback from people (positive or negative). Looking for some statistics. FWIW, we don’t plan to overbuild (cost is very reasonable for the area), but our home would be a modern/contemporary home whereas 99% of the homes in the area are stick-built traditional. It’s a very aesthetically pleasing design, and I know it would attract a lot of buyers, but I’m not sure if the bank shares my beliefs.
I would assume the take-out mortgage will be based on the value of the land plus improvements. I’ve read that you can get loan-to-value of at least 90% and sometimes up to 97% (which seems insane to me). It is true that value via appraisal may not match your construction cost. The value the lender is looking at is what a willing buyer would pay for the house + land.
Does the bank you are dealing with do a lot of new construction financing in your area? If not, look for a reputable lender that specializes in construction loans. Ask realtors who sell new construction for recommendations.
This is what one of our local lenders that finances construction requires for loan application:
Look for a construction to perm loan - one that is specifically designed to convert from a short term interest only construction loan to a permanent fully amortizing fixed rate mortgage. Look for a lender that knows this product well.
fractakmstr, We are also getting ready to build. We haven’t finalized financing but have talked to a few banks and haven’t heard anything like this. (Our LTV will be something like 30%.) You might try posting over on the “Building a Home” forum on GardenWeb, or just searching there.
I appreciate all of the feedback so far! @BunsenBurner As a matter of fact, yeah, we are dealing with a credit union in our area that handles a lot of custom builds. Got an appointment with their real estate person next week. Our situation is slightly different because my dad will be acting as general contractor (he is licensed). This is a boon in some ways since we will save money, but a drawback because we carry all of the financial risk.
@rockvillemom I think that’s the one I’m leaning towards at the moment. I’ll have to see what our lender is able to offer us.
@1moremom I’ll take a look! Good luck with your build too!
Does anyone have any information on how the final appraisal works? Some sources I’ve read say that it is a verification of the first appraisal (i.e. see if everything was built to spec and on budget), while other sources are saying it’s a completely new, ground-up appraisal. I’m a bit worried if it’s the latter since that basically puts us at the mercy of the housing market…
From what I have seen with construction to perm - the initial appraisal is done based on plans and specs and assigns a value to the home based on what the value will be after completion. Then, a final inspection is done at the end - to verify the house is finished - but the value does not change - no surprises.
I remember stressing out about the floor downstairs, since it was just painted concrete. I wanted to make sure I got it painted before they came to assess the house, andthat I had finished putting the polyeurathane on all the kitchen cabinets. If I remember correctly, the appraiser must have just done a driveby to see that it looked finished, because he never came inside or anything like. It was just proforma…
Anyone’s experience with appraisals, home loans etc. from before the financial crisis may or may not be applicable today. Financial regulators and lending institutions have tightened many of the criteria, and require much more from appraisals in general. This is to some extent closing the barn door after the horse has bolted, but understandable.
We considered a custom build 2 years ago, and the banker we talked to said pretty much what Rockvillemom said in post #9. And the bank needed every little detail about the plans and materials used!
That’s helpful information. So is the first appraisal good for a certain amount of time then?
That brings up another question I had – If the original quote for the materials goes up in price while the home is being built, can you add that difference to final appraisal?
Your situation may be complicated by your father acting as gc. In the deals I have seen, the builder and homeowner sign a contract as to the cost of the build. If the puchaser has change orders - that’s on them - but the builder/gc should bear the financial responsibility for the cost of materials.
So another question… Does anyone know what kind of protection the owner has against contractors not performing, or not completing the job? Hypothetically, if I were to get a GC other than my dad, what protection to I have against a bad GC? Is there some kind of shared liability in the construction loan that stipulates the GC must uphold his end of the deal?
From what I’ve read on the issue, it seems like the GC really isn’t liable for much if things go wrong. They can just up-and-leave the project and the bank goes after the homeowner. Am I understanding this correctly?
My impression is that the GC could be liable for work and/or materials paid for but not completed or delivered. This is one reason why your construction lender will probably have a schedule of loan draws based on work completed and will generally not release funds until after the work is done as per schedule. The bank may also require releases of mechanics liens for work done by subcontractors, which is good practice even if there is no construction lender involved.
Much depends on the specific contract terms, but I would think it could be very hard to legally force the GC to build your house for $100K if it would cost him $200K to do so, no matter what your contract says.