What Does it Mean to be “Out of Balance” on a Construction Loan?

Shared by Ed Currie of Associated Bank

Being out of balance means you don’t have enough funds remaining in the loan based on the costs needed to complete the project.  This generally occurs when the costs of the project have increased from the original budget.
For lenders it is important that there are sufficient funds available in the loan to complete the project in case the homeowner does not complete the project.  This way the lender can use the funds set aside to complete.  Lenders never want to take back a home much less an incomplete home.
When a loan becomes out of balance, it needs to be remedied to get back in balance.  Typical remedies include having the homeowner bring in cash or have the builder reduce his or her fee to make up for the cost increase.
New Home Model Concept
Ed Currie Associated Bank

Ed Currie

Associated Bank

Meet the Author ...

Ed Currie

Ed Currie began assisting clients with mortgage financing in 1994 during one of the slowest mortgage markets in the last 25 years. The slow market allowed Ed to develop his client-centric philosophy and drive to make the process as stress-free as possible. Since that time, Ed has assisted over 5000 clients with total loan production exceeding $1 Billion.

What Can I Do To Prepare For Applying For a Construction Loan?

Shared by Ed Currie of Associated Bank

Being prepared to apply for a mortgage can be very helpful in making the process smoother.  Mortgage companies are required to “fully document” a file.  Below are a few items that can ensure your loan application is not derailed, and will also limit the amount of documentation needed.

Income

Don’t Change Jobs: Changing jobs just before or during a loan application could possibly render your new employment income unusable or delay closing until your new income can be documented.

When you change jobs, your income will change.  While very few people change jobs to make less money, the way compensation is structured from how mortgage companies view “stable income”  may reduce the income that can be used to qualify.  For example, if you go from a salaried position to a commissioned position, your income may be viewed as less.  Even if the new employer communicates that your new variable income is “guaranteed”, they will very rarely put that in writing in order to make it usable.

Bottom line – if at all possible hold off on a job change until after closing.

Credit

Check your credit: Check your credit at www.annualcreditreport.com.  This is a free report available to all consumers once per year.  Make sure it is accurate and there are no negative items listed.  If there is collection activity on your report that you were unaware of and they are less than a year old, pay them off.  If they are older than two years you may be better off leaving them for now.

Don’t pay for your credit score: There are hundreds of different credit scoring models out there.  The only model that matters is the mortgage model that the mortgage company will pull when you apply for your loan.  Just because superdupercreditscore.com has your credit score at 900 doesn’t mean your mortgage score is 900.  There is NO correlation.  Save your money and work on the things that hurt your score.

Applying for new credit:  Limit new credit inquiries.  Credit checks hurt your score.  In most cases it’s not a big deal, but if you are on the bubble it can be the difference between approval and denial.

Keep your credit card balances low: One item that has a significant impact on credit scores  is the balance on credit cards relative to the limit of the card.  The “utilization rate” can absolutely obliterate a credit score.

As the utilization rate get above 10% (i.e. balance of $1,000 on a $10,000 limit) your credit score drops. It is common to see someone’s credit hurt by 50-75 points for having high balances on credit cards.  Keep them as low as possible; definitely below 30% and ideally below 10%.  If you use credit cards on a regular basis, make a payment on a weekly basis to keep the balance down (you can do that).

Also, the credit score impact is per card.  If you use multiple cards and as a whole are below 30%, but one or two are at 75%, you are still going to be penalized.  The credit score model looks at each card.  If you want to optimize your scores when they are pulled, keep the balances low on all cards before, during and until you close on your mortgage.

New Home Model Concept

Assets

Documenting the borrower’s source of funds is an area that is highly scrutinized.  Documenting the source, the acceptability of that source, and any “large” deposits can add a lot of additional documentation and in extreme cases, get your loan denied.

Season assets: You will be required to document two months of bank statements when you apply for your loan.  Any funds that go into your account previous to the preceding months statement are seasoned.  If there are any funds that you would like to avoid with the additional documentation, get those in your account well ahead of applying for your loan.

Large deposits: A large deposit is generally viewed as a non-payroll deposit of 50% or more of your monthly income.  A large check deposited into your account will need to be sourced.  Where did it come from?  Is it an acceptable source for down payment? For example, an unsecured loan from any source is generally not allowed.  If the funds won’t be in your account previous to the two months of statements you will provide, be prepared to prove where the funds came from.

Moving money around: Moving money from different accounts can create a lot of extra documentation.  Do you have multiple accounts with the same bank and move funds between them routinely?  If you do you will most likely have to provide all of the accounts to show that you are the account holder of the account.  It’s a lot of documentation.  Avoid or limit money movement if you can.

Where is the down payment coming from?: There are a lot of different, acceptable sources for a down payment.  There are also unacceptable sources as well such as unsecured loans and credit card advances.  If you won’t be pulling your down payment from your own liquid account (ie checking and savings accounts), be sure to talk to your mortgage person before you move any funds around or make a deposit.

One account?: If you have the time and ability to plan 3-4 months ahead, you could move all funds into one account that you plan on using for the down payment.  If you did that and had no activity in or out, it would drastically limit the bank statement documentation you will need to provide for the loan application.

Documents

There is a bunch of documentation that is needed for a loan application.  While you may be able to alleviate some of it by the suggestions in this article, you will still need to provide a number of items.  You might as well start gathering some of those items or at least know where they are:

  • Make sure you have pay stubs and can access them

  • Locate your complete tax return and W2s

  • Do you have K-1s listed on Schedule E?  We will need those too.

  • If you own 25% or more of a business or partnership, we will need the corporate returns as well.

  • If you own 25% or more of a business, we may need a year to date, unaudited, profit and loss

  • Bank statements – we need actual statements.  If you no longer get them mailed to you, be sure you know how to access them online

Construction Items

You generally won’t have your construction items for a while, but there are a few items to consider early on:

Timing issues if you will be purchasing a property:  If you plan on purchasing a property and closing on your construction loan at the same time, be sure you understand the amount of time you need.  You will need time to decide on a contractor develop the project scope, and time to get a firm budget.  Only then can you order the appraisal which you will want to do no later than 30 days prior to closing.  As you might imagine, it can be very difficult to get all of that done in a 45-60 average closing time frame.  Depending on your potential project, you may want to consider closing in two steps; property acquisition and then the construction loan.

Understand what will be needed for the project cost:  For a construction loan you need to document the complete cost of the project.  It most cases the project cost will be the budget from the builder or general contractor (GC) you select.  But in some cases, clients may opt to have some costs separate from the GC.  If this is the case, you need to obtain bids for the material and labor for all items outside the GC budget before the appraisal can be ordered
Ed Currie Associated Bank

Ed Currie

Associated Bank

Meet the Author ...

Ed Currie

Ed Currie began assisting clients with mortgage financing in 1994 during one of the slowest mortgage markets in the last 25 years. The slow market allowed Ed to develop his client-centric philosophy and drive to make the process as stress-free as possible. Since that time, Ed has assisted over 5000 clients with total loan production exceeding $1 Billion.

Renovation Loan Programs for Projects of Every Size

Figuring out which home renovation loan is the best fit for your project and your budget can be overwhelming. Whether you need to need to make a few repairs here and there or totally gut your new home, there are loan available to meet the needs of every homeowner and every project. Here are a few common renovation challenges and their most suitable loan options:

“I need less than $35,000 to make minor repairs.”

The FHA Limited 203(k) program is a great option for homeowners who need less than $35,000 to finance minor home repairs or replacements like plumbing, insulation, roofing or flooring. This program allows for homebuyers to include an additional $35,000 into their mortgage to cover the cost of making limited repairs to their home. Other eligible activities include: interior and exterior paint; repairing drainage, HVAC, and electrical systems; installing new appliances and adding a deck or patio.
style-31-gray-floating-shelves-kitchen-15011-a4-WMNAIHBR

“I need affordable credit to remove health and safety hazards.”

The USDA Section 504 Home Repair Program provides both financing and grants for very-low-income homeowners. Families with income below 50 percent of the area median income that are unable to obtain affordable credit can get a loan of up to $20,000 to repair, improve or modernize their homes. 20 year loans are offered at a fixed 1% interest rate. Grants are also available to homeowners age 62 or older that are unable to repay a repair loan. Grant recipients receive $7,500 to remove health and safety hazards. Loans and grants can be combined for a total of $27,500 in renovation funding.

"I want to finance luxury upgrades."

With a Fannie Mae Homestyle Renovation Program Loan, you can finance luxury upgrades like new swimming pools, gazebos or detached garages that are not allowed under FHA guidelines. The Homestyle program application process is also much simpler than the other options. There is one application for both the home purchase and the renovation loan, one closing and one set of fees.  As with the FHA Standard 203(k) program, you can finance 6 months of mortgage payments if the house is uninhabitable during construction.
NAIHBR’s lender members offer renovation loan options for every type of project and homeowner. For more information or to join NAIHBR contact us at 855-733-8100.
Jeffrey Cook, Executive Director

Jeffrey Cook

NAIHBR Executive Director

Meet the Author ...

Jeffrey Cook

20 year veteran of IT and real estate marketing systems development. Jeff co-founded and was the development architect for the Home123 marketing platform.

Can I get a deposit for certain items under a construction loan?

Shared by Ed Currie of Associated Bank

The construction program is generally paid out based on work completed. However, deposits can be obtained for custom items where its’ typical for the provider to require a deposit. Items such as cabinets, windows, and counter tops can generally get a deposit with the final balance provided when they are on site and installed.

For larger custom homes, there can be instances where a custom item may need a 50% deposit. This can generally be accommodated as long as an invoice from the provider is received indicating a 50% deposit is needed. Once the item is installed, the remaining balance will be paid out.

New Home Model Concept
Ed Currie Associated Bank

Ed Currie

Associated Bank

Meet the Author ...

Ed Currie

Ed Currie began assisting clients with mortgage financing in 1994 during one of the slowest mortgage markets in the last 25 years. The slow market allowed Ed to develop his client-centric philosophy and drive to make the process as stress-free as possible. Since that time, Ed has assisted over 5000 clients with total loan production exceeding $1 Billion.

Virtual Inventory, using technology to help customers see a property’s true potential

Leveraging technology opens a world of possibilities for real estate marketing.  Most agents understand the power of the MLS and syndication to data sites such as Realtor.com, Zillow and the like.  Few however, take real advantage of what technology can do in local marketing, and it can create a huge competitive advantage the real estate agent.

For this post, we’ll focus on one of the more powerful techniques an agent can leverage which I call “virtual inventory”.  Most buyers today, especially millennial buyers, are looking for “move in ready” inventory, and we all know that can mean different things to different people.   As the selling agent, your chances that the listing has exactly what that buyer wants at that moment time is low to say the least.  Even if you get your seller to agree to upgrades (which most simply won’t do), you are just guessing at what the market wants.  This is where “virtual inventory” really helps.

Proposed Kitchen Remodel

Virtual inventory simply refers to “proposed” changes to a property.  It can be as simple as some new flooring or cabinets to an entirely new structure.  The key is images.  People want to “see” the improvement.  Most of the time, these images can be provided directly by service providers or trade groups such as NAIHBR along with pricing estimates making things simple for the selling agent.

In most cases, virtual inventory cannot be used on an MLS listing (there are a few exceptions where it can be), so how does an agent leverage this technique?  Simple, local and point of interest marketing and their own website.  Here are a few examples…

  • Having "as is" and "proposed" listings on an agent’s website is a powerful way to build additional value for the client and differentiate the agent from competitors.
  • Take one flyers can have before and after data based on whether purchased as is or with improvements.
  • Agents who do open houses can create room based improvement pages showing clients what the house “could be”, while using text and scanning techniques to gather customer contacts. **NOTE - This technique is particularly effective for getting additional listings when neighbors see how you are marketing the home and it takes very little effort.

The list of effective techniques goes on and on.

So how do you get started with building virtual inventory?  The easiest way to work with organizations that provide aggregated information such as NAIHBR.  NAIHBR is a not for profit trade association that provides simple forms where agents can request images and data for both renovation and new construction options.  Otherwise you can try to work with your local service providers to supply the images and estimates.

Jeffrey Cook, Executive Director

Jeffrey Cook

NAIHBR Executive Director

Meet the Author ...

Jeffrey Cook

20 year veteran of IT and real estate marketing systems development. Jeff co-founded and was the development architect for the Home123 marketing platform.

What Can I Do To Prepare For Applying For a Construction Loan?

Shared by Ed Currie of Associated Bank

Being prepared to apply for a mortgage can be very helpful in making the process smoother.  Mortgage companies are required to “fully document” a file.  Below are a few items that can ensure your loan application is not derailed, and will also limit the amount of documentation needed.

Income

Don’t Change Jobs: Changing jobs just before or during a loan application could possibly render your new employment income unusable or delay closing until your new income can be documented. 

When you change jobs, your income will change.  While very few people change jobs to make less money, the way compensation is structured from how mortgage companies view “stable income”  may reduce the income that can be used to qualify.  For example, if you go from a salaried position to a commissioned position, your income may be viewed as less.  Even if the new employer communicates that your new variable income is “guaranteed”, they will very rarely put that in writing in order to make it usable.

family contract

Bottom line – if at all possible hold off on a job change until after closing.

Credit

Check your credit: Check your credit at www.annualcreditreport.com.  This is a free report available to all consumers once per year.  Make sure it is accurate and there are no negative items listed.  If there is collection activity on your report that you were unaware of and they are less than a year old, pay them off.  If they are older than two years you may be better off leaving them for now.

Don’t pay for your credit score: There are hundreds of different credit scoring models out there.  The only model that matters is the mortgage model that the mortgage company will pull when you apply for your loan.  Just because superdupercreditscore.com has your credit score at 900 doesn’t mean your mortgage score is 900.  There is NO correlation.  Save your money and work on the things that hurt your score.

Applying for new credit:  Limit new credit inquiries.  Credit checks hurt your score.  In most cases it’s not a big deal, but if you are on the bubble it can be the difference between approval and denial.

Keep your credit card balances low: One item that has a significant impact on credit scores  is the balance on credit cards relative to the limit of the card.  The “utilization rate” can absolutely obliterate a credit score. 

As the utilization rate get above 10% (i.e. balance of $1,000 on a $10,000 limit) your credit score drops. It is common to see someone’s credit hurt by 50-75 points for having high balances on credit cards.  Keep them as low as possible; definitely below 30% and ideally below 10%.  If you use credit cards on a regular basis, make a payment on a weekly basis to keep the balance down (you can do that).

Also, the credit score impact is per card.  If you use multiple cards and as a whole are below 30%, but one or two are at 75%, you are still going to be penalized.  The credit score model looks at each card.  If you want to optimize your scores when they are pulled, keep the balances low on all cards before, during and until you close on your mortgage.

Assets

Documenting the borrower’s source of funds is an area that is highly scrutinized.  Documenting the source, the acceptability of that source, and any “large” deposits can add a lot of additional documentation and in extreme cases, get your loan denied.

Season assets: You will be required to document two months of bank statements when you apply for your loan.  Any funds that go into your account previous to the preceding months statement are seasoned.  If there are any funds that you would like to avoid with the additional documentation, get those in your account well ahead of applying for your loan.

Large deposits: A large deposit is generally viewed as a non-payroll deposit of 50% or more of your monthly income.  A large check deposited into your account will need to be sourced.  Where did it come from?  Is it an acceptable source for down payment? For example, an unsecured loan from any source is generally not allowed.  If the funds won’t be in your account previous to the two months of statements you will provide, be prepared to prove where the funds came from.

Moving money around: Moving money from different accounts can create a lot of extra documentation.  Do you have multiple accounts with the same bank and move funds between them routinely?  If you do you will most likely have to provide all of the accounts to show that you are the account holder of the account.  It’s a lot of documentation.  Avoid or limit money movement if you can.

Where is the down payment coming from?: There are a lot of different, acceptable sources for a down payment.  There are also unacceptable sources as well such as unsecured loans and credit card advances.  If you won’t be pulling your down payment from your own liquid account (ie checking and savings accounts), be sure to talk to your mortgage person before you move any funds around or make a deposit.

One account?: If you have the time and ability to plan 3-4 months ahead, you could move all funds into one account that you plan on using for the down payment.  If you did that and had no activity in or out, it would drastically limit the bank statement documentation you will need to provide for the loan application.

 

Documents

There is a bunch of documentation that is needed for a loan application.  While you may be able to alleviate some of it by the suggestions in this article, you will still need to provide a number of items.  You might as well start gathering some of those items or at least know where they are:

  • Make sure you have pay stubs and can access them

  • Locate your complete tax return and W2s

  • Do you have K-1s listed on Schedule E?  We will need those too.

  • If you own 25% or more of a business or partnership, we will need the corporate returns as well.

  • If you own 25% or more of a business, we may need a year to date, unaudited, profit and loss

  • Bank statements – we need actual statements.  If you no longer get them mailed to you, be sure you know how to access them online.

Construction Items

You generally won’t have your construction items for a while, but there are a few items to consider early on:

Timing issues if you will be purchasing a property:  If you plan on purchasing a property and closing on your construction loan at the same time, be sure you understand the amount of time you need.  You will need time to decide on a contractor develop the project scope, and time to get a firm budget.  Only then can you order the appraisal which you will want to do no later than 30 days prior to closing.  As you might imagine, it can be very difficult to get all of that done in a 45-60 average closing time frame.  Depending on your potential project, you may want to consider closing in two steps; property acquisition and then the construction loan.

Understand what will be needed for the project cost:  For a construction loan you need to document the complete cost of the project.  It most cases the project cost will be the budget from the builder or general contractor (GC) you select.  But in some cases, clients may opt to have some costs separate from the GC.  If this is the case, you need to obtain bids for the material and labor for all items outside the GC budget before the appraisal can be ordered

Ed Currie Associated Bank

Ed Currie

Associated Bank

Meet the Author ...

Ed Currie

Ed Currie began assisting clients with mortgage financing in 1994 during one of the slowest mortgage markets in the last 25 years. The slow market allowed Ed to develop his client-centric philosophy and drive to make the process as stress-free as possible. Since that time, Ed has assisted over 5000 clients with total loan production exceeding $1 Billion.

How long can I be in the construction phase?

Shared by Ed Currie of Associated Bank

The construction phase is the period of time your home is under construction. Once your home is complete, the loan moves to the permanent phase with payments of principal and interest.

Every construction phase is initially setup for 12 months. If you use less time, the loan will move to the permanent phase once your home is done. So you can’t ride out an interest only payment for the full 12-month period. Once it’s complete, the payment changes from interest only to principal and interest. If more time is needed, a one-time extension of up to 6 months can be obtained if requested at no charge.

Home Building NAIHBR couple with contract
Ed Currie Associated Bank

Ed Currie

Associated Bank

Meet the Author ...

Ed Currie

Ed Currie began assisting clients with mortgage financing in 1994 during one of the slowest mortgage markets in the last 25 years. The slow market allowed Ed to develop his client-centric philosophy and drive to make the process as stress-free as possible. Since that time, Ed has assisted over 5000 clients with total loan production exceeding $1 Billion.

What happens to a construction loan once a home is built?

Shared by Ed Currie of Associated Bank

The only change in the loan after your home is complete is the payment. During construction it is interest only based on balance owed and after construction it changes to principal and interest. The actual P&I payment will be determined by the final balance of the construction loan and the remaining term of the loan.

This change occurs after you take your final draw and the inspection confirms your project is complete per the plans and specs. It will then generally be 30-45 days when the change occurs.

Concorde Normandy
Ed Currie Associated Bank

Ed Currie

Associated Bank

Meet the Author ...

Ed Currie

Ed Currie began assisting clients with mortgage financing in 1994 during one of the slowest mortgage markets in the last 25 years. The slow market allowed Ed to develop his client-centric philosophy and drive to make the process as stress-free as possible. Since that time, Ed has assisted over 5000 clients with total loan production exceeding $1 Billion.

What does a typical timeline look like on a construction loan?

Shared by Ed Currie of Associated Bank - Initial content published March 2016

Everyone’s timeline will be different. Putting the appraisal aside, it generally will take a week or two to get the loan approved. The approval of the loan will work concurrently with the appraisal process.

The single biggest item that impacts how long it takes to close on your construction loan is when adequate plans and a budget are available. Because the construction loan appraisal is based on the plans and specs of the project, the appraiser cannot begin until those are available. You want to give yourself 30 days from when the plans and budget are available to order the appraisal before you close your loan.

Home Building NAIHBR couple with contract

The things that will have the biggest impact on how long it takes to close your construction are:

  • How long will it take to get all of the supporting items we need from you.
  • How long before the plans and budget are done so we can order the appraisal
  • How long will we sit in underwriting queue for approval
  • How long will the appraisal take
  • Will we have a tough time document ting something the underwriter needs
  • Will we have any appraisal delays or issues
  • The dreaded “unexpected”

Issues above aside, if everything goes as planned and we are able to order the appraisal right away or early in the process, the typical start to close time frame can be 30-60 days. If we are able to get all we need from the client right away and order the appraisal we’ll be closer to the 30 day time frame. If it takes a while to get items from the client and the appraisal can’t be ordered for a while, it will be closer to 60 days or longer. We’ve had a few clients that have taken a year to close due to delays in plans and changes in builders and budgets.

Ed Currie Associated Bank

Ed Currie

Associated Bank

Meet the Author ...

Ed Currie

Ed Currie began assisting clients with mortgage financing in 1994 during one of the slowest mortgage markets in the last 25 years. The slow market allowed Ed to develop his client-centric philosophy and drive to make the process as stress-free as possible. Since that time, Ed has assisted over 5000 clients with total loan production exceeding $1 Billion.

Why is selling a lot or teardown listing so difficult?

With interest rates near all-time lows, and home sales on the rise, one would think buyers would be snatching up lots and teardown properties left and right. But they are not. Why?

Vacant Land for sale

The realty is many buyers want to build new homes, but hesitate because they know nothing about the building process and it seems intimidating. Once they buy the lot or tear down where do they go from there? How do they find an architect, a builder, get permits, estimate costs, etc? The whole process can be overwhelming and it can discourage them from pulling the trigger.

In addition, the visualization a buyer has when looking at existing properties is not there to create an emotional attachment. In other words, buyers find it difficult to picture their new home complete on the lot. Logic says buy the lot, but the emotional appeal that actually brings them to action is missing and we all know that purchasing a home is a very emotional process for most buyers.

Whether you have a vacant lot listing or a teardown, the challenges can be great and the compensation low. NAIHBR can change that by providing two new marketing programs that get you more exposure and increase your commission amounts.

Whether you have a vacant lot listing or a teardown, the challenges can be great and the compensation low. NAIHBR can change that through its partnership with Proposed Properties by providing two new marketing programs that get you more exposure and increase your commission amounts.

Let's face it, real estate is a numbers and timing game. We need to find the right person at the right time who is interested, motivated and financially capable to get a deal done. Naturally the more offers we have in the market, the more opportunity we have to find that person.

That is exactly what Proposed Properties does when partnering with real estate professionals. We provide a second or even multiple options to market lots, tear downs or renovation candidates.

  • Proposed Properties helps you match lot and teardown listings with models that will compete in your market.
  • Proposed Properties helps you with communication between your buyer and the builders or renovation companies.
  • Most importantly, Proposed Properties helps you get paid
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(855) 733-8100
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