The Construction Loan Process

It’s been a while since I posted on here, and that is because it’s been a while since anything progressed. We were held up by the construction loan process and all of its caveats.

Construction lenders require that your plans have been submitted and reviewed by the county before you can move forward with your construction loan. That is because they want to know that the house you want to build actually CAN be built. They want any changes the county may require to be accounted for BEFORE they agree to lend on this hypothetical house.

My husband and I have a background in mortgage lending, in underwriting specifically and that helped us immensely to be able to speak the same language as the lender throughout this process. There were just a couple of major hurdles we had to overcome, but they ended up being time consuming.

In a construction loan, both the borrower (us) and the builder (contractor) must be approved by the lender. We had already chosen our contractor. In our case, we selected our contractor because it was someone we knew, he had done custom home builds which we toured and talked to the homeowner, they were up and coming and priced reasonably, but most importantly it was someone we trust. 

The builder was required to submit their financials and detailed cost estimates to the lender. Once the builder is approved with the lender, they can carry that with them for other jobs. Our contractor was eager to be approved for his resume and very compliant in doing so. The shear amount of information they are required to submit is a huge task. Despite knowing it may not be exact, they are required to estimate for every line item of our construction to make sure the cost falls within our loan amount. 

The loan terms are a 30 year loan, the first 12 months are an interest only payment base on the outstanding balance. After the first year, we are expected to be done with construction, and the loan flips to a 29 year fixed rate loan. 

The other major hiccup we had was with belongings we had on the property. The lender is extremely leery of ANY work having been done on the property. They want zero chance that a mechanics lien could be placed by a contractor that would jeopardize the first lien position of the construction loan.

Once we had plans approved by the county, the lender sent out an appraiser to view the property. At this point we had had tree removal done at the property which we had paid for in full. The lender had to be told we did this work ourselves because they would not have allowed work to have been done, despite us paying for it in full. 

They also took issue with our boat, tractor, camper, and the shipping container we had on the land. The boat and camper were easy to show that we hold DMV title too, but the tractor and container have no title. Their fear was that the container and tractor could be rentals, or belong to a contractor, that could lien the property. We had to write a letter stating they were ours, provide the bill of sale for the tractor and the towing receipt for the container when it was brought to our land. They then stipulate that another inspection will be done the day of closing to reassure no work was being done, we were at a stand still. We continued to work on the fence, but otherwise, nothing could be accomplished. During these delays we were also required to provide updated financials for ourselves.

We did ask the county if they would split off our permit for grading, allow us to pay that and approve it separately so we could at least begin grading. The grading permit was @$500 and was required because we were moving over 400 yards of dirt. We also had more trees and some poison oak removed while the bobcat was on the property. The bobcat rental was @$1300 for the week.

My pessimistic outlook meant that I spent this whole time waiting for the other shoe to drop, for something to go wrong. We’d always said we would build this house one way or another, but if the loan didn’t go through, we were dead in the water. That final approval was much celebrated. We signed our loan documents with the kids in tow and met with the contractor the next day to begin digging the footings for the foundation.

Our loan paid off the small $35k note held by the former owner, gave us a $50k draw to pay for permits, and $10k to get started on construction. Draw periods are pre determined at set points throughout construction, as we meet those targets. 
The foundation will be concrete slab on grade. We’d had the building pad graded and they are required to dig footings down 18″ into undisturbed soil under the perimeter and load bearing walls. We marked out where we wanted the house to sit and the contractor chalked out our floor plan. After a year of designing, this was the first time we could walk through our life sized floor plan marked out on the ground. This is a large home 2,948 sqft on the ground floor, but it’s strange how everything feels small on the ground. The layout itself felt good. We looked out where windows and doors would be for what the looked out on.

Our original plans included a workshop to be added later. We decided to move that up concurrent with the build. It will make storage during construction, the sale of our house, and moving, much more feasable. We also marked out the location if the 5,000 gallon water storage tank we are required to have, all of the time being aware of setbacks on everything, i.e. power must be 10ft from a structure, water must be 30ft away, buildings must be 50ft from the property line, etc. We also chose the location of the septic tank, careful that it is not too close to the house itself but still accessible for pumping, etc.

It is a challenge to try to plan out everything from scratch, hoping we won’t regret later where we placed anything since these are permanent locations, it definitely requires vision!

There isn’t much we can help with ourselves right now. We like to go out and just see the progress. This week we’ve been a little delayed by wet weather, but that has passed and some dry days mean the contractors will be back out prepping for the foundation pour!

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