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Old 01-06-2012, 06:34 AM
 
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Hello Everyone,

Anyone here have experience with construction loans?

Here's what I have in mind:
I own 150 acres of land with a small cabin in upstate New York, free and clear, no mortgage. I paid it off in 2010. I want to build a larger home with a barn on my upper pasture. I am hoping to use the construction loan to build the house/barn, install septic, drill a well, install solar panels and windmill and some fencing and perhaps some furniture.

I've done a bit of research and found that I can get and All-in-one type construction loan that rolls itself into a standard mortgage. I also know about the "interest buffer" to cover mortgage payments while the construction is happening (sort of get more money than you need thing). And that I should seek a "line-of-credit" type loan to keep better control of the money.

But I also see that some money down is required for those who don't own property and are starting fresh and new. But since I own property, couldn't I just use that as leverage or am I still going to require cash down on my own place? Sounds kind of silly actually. If I do need money down that kills the plan dead right away.

Thanks for your help and advice.
Ted K.
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Old 01-06-2012, 08:59 AM
 
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Subdivide the property and sell 10 small 1 acre lots for $25k each, build the house for cash. With that much land, why would you want to pay interest to a bank?
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Old 01-06-2012, 10:42 AM
 
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Generally the way lenders look at a construction-to-perm loans is the most favorable way to proceed. You will very likely need to have at least 20% in cash / cash equivlents of the total construction costs before they will approve your loan. It gets complicated as to how they will apportion your "pre construction collateral" toward the loan becuase you really are not going to give them a "down payment" at all...

The "construction loan phase" has the most risk to the lender, as if you run into some kind of trouble and they end up with a barely started building on your huge chunk of land they are worse off than if they just repossed the land becuase they'd have to find some one to buy the project and probably start fromm scratch...

Once the whole thing is constructed the lender can probably sell the loan in the secondary market and their risk is pretty much gone. The price they get on the secondary market is a function of how closesly the loan, were it to be audited, conforms to a convention 20% down deal. The various draws that you make to pay the contractors AS WELL AS YOUR OWN MONEY that you put into the projectr will all be accounted for and will hopefully allow the lender to get maximum price on the secondary market...

SO if you envision the construction costs of the house / garage (I would not call even a big barn looking thingy as a true "barn" unless you intend to use it for agricultural purposes and then you are talking about a BUSINESS LOAN, not a residential mortgage...) to be be say $200k you really will need to have at least $40k (and maybe as much as $100k...) in cash or government bonds or maybe blue chip stocks / funds. If you deal with a lender that has done this kind of projects in the past you might be able to do things like landscaping and driveway building with your backhoe / local labor and count that towards the equity BUT given the increased documention and scrutiny that the collapse of the mortgage backed securities in 2008 caused I would be prepared for a worst case scenario of needing $100k in cash to spend for HALF of the invoiced costs of the construction...

I think that you may have to think about subdivided some of parcel if you do not have liquid assets. I hope there is market for the adjacent land / smaller home sites. Technically if there is NO interest and the home you intend to build does not appraise out the lender will not be able to sell the loan on the secondary market and then you need to be sure the lender is a "portfolio lender" who can afford to hold the loan for its full term AS WELL AS being the kind of lender that will be OK with just approving the loan based on its PROJECTED value as a function of the building costs...

Hate to paint such a grim picture but this is the "rubberband effect" of the housing bubble...
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Old 01-06-2012, 01:07 PM
 
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Default That nails the coffin shut

So much for that plan.

I will NOT sell off any of my land. I'm trying to set up a non-profit animal rescue facility and the last thing I want is more hunters buying land around it.

Okay, then I will just have to find another way.

Grim picture indeed.

Thanks for your advice.
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Old 01-06-2012, 02:50 PM
 
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Quote:
Originally Posted by theojkett View Post
So much for that plan.

I will NOT sell off any of my land. I'm trying to set up a non-profit animal rescue facility and the last thing I want is more hunters buying land around it.

Okay, then I will just have to find another way.

Grim picture indeed.

Thanks for your advice.
Your local bank should easily be able to use the land as collateral in lieu of cash down payment (assuming the value of the land is at least 30% of the porject cost). Now if you bank at one of the mega banks, they may not do it. If not, close all your accounts and move them to a local community bank who will do the construction loan for you.

You may not be able to do the 'one close construction to end loan' that you are talking about, but if the property is 150 acres, you won't be able to get a Fannie Mae/Freddie Mac type conventional loan any way. If you want a low rate 30 year fixed rate loan you should parcel off 5 or 10 acres where the house is going to sit. You could then get a 30 year fixed on the home and the small acerage and the rest of the land would be free and clear. This would require a survey, a new legal description and approval by the township for the land split.
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Old 01-06-2012, 03:52 PM
 
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I had not thought of splitting the parcel, that might be angle worth pursuing. Both parcels might be acceptable as collateral on the construction loan and then a "normal" mortgage would be written on just the "homestead" parcel. I would work on making friends with the local bankers, and if they tend to the types to like hunting and fishing I would not disclose too much about the "santacuary" plans. Stick to the more generic "this will be for my hobbies" when it comes to the out building(s)...

Of course you will need to have sufficient documentable income to pay the mortgage ...
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Old 01-09-2012, 07:55 AM
 
11 posts, read 56,884 times
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Default Thanks for your help

Thank you all for you input, but after serious consideration, I've decided to NOT pursue any type of loans on the property. Since I own it outright and I already have a house on it, why put a lein on the property right? How many people can say they own their homes and the land it sits on? Not many.

I'll make due and I'll find a way.

TED
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The Ups and Downs of Construction Loans-100_4744.jpg  
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Old 01-09-2012, 08:04 AM
 
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Very scenic! I hope things work out, looks like a dream.
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Old 01-09-2012, 09:25 AM
 
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To each their own.

I've never understood people who own hundreds of acres and have no money and dont want to change a thing. Like I said, if it was me, I'd sell parcels, sell trees, soil, rocks, anything to live a comfortable life and still enjoy the property. When I die I cant take it with me.
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Old 01-09-2012, 09:50 AM
 
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Default The land belongs to......

I have had logging done and those funds were used to make improvements to the house and pay bills in an effort to improve my comfort level. Sadly logging can only be done once every 5 years and I pretty much took all the good stuff.

At the moment, I have two neighbors and both of them respect and understand my privacy and distaste for hunting. The last thing I want to do is sell off land that would invite more hunters to the area.

I'm quite comfortable and I will manage. But I can leave it to those who will carry on the legacy.

TK
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