How to Pre-Qualify for Building Your Own Home

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The go-to source for building your own home is typically a bank. Learn how to pre-qualify for building your own home with help from a real estate and mortgage professional in this free video clip.

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Video Transcript

Hello, this is Sidney Potter, from Potter Equity's in Pasadena, California. Thank you for your time. I've been asked to comment briefly on how to pre-qualify for building your own home. When it comes to pre-qualification for building your own home, the go to sources are typically going to be banks. And they have what they call an all-in-one, a construction to permanent loan, a one time close and also honest with each other, and that is the type of loan product that you're going to need in order to pre-qualify and build your own home. Now what I'd like to do is give you a few tips on where to go in addition to those type of go to sources. Keep in mind that nearly all banks have this type of loan product, all your major banks, and certainly some of your credit unions. It's much similar in term of the pre-qualification to build your own home, which typically means a custom home as you'll find in buying a normal home. When you go about pre-qualification to build your home, find a very experienced construction loan broker. They're a slightly different breed from your typical loan officer, mortgage broker, that's because they specialize in the area, it's not really a time to go with the newbies in terms of loan officers, but you want a specifically a construction loan officer. Very important to have these relationships when you go to these types of professionals, because these brokers give class-rate, low-down, wholesale rates, because they do volume. You're in a much better position in terms of getting that type of ideal rate, because building your own home through a custom broker or a custom home builder can be slightly more expensive that what you anticipate. Also if you're looking for resources in which to pre-qualify in order to get a mortgage loan to build your own home, go to custom builders, they're typically an all-in-one stop inclusive location. Why? Because they certainly would have these relationships with lenders or private money in terms of financing, because it gets the product off the ground so much easier. And also and lastly, in terms of going to sources, FHA, even though they have what they call two or three construction loans, those are rehab loans, where they cap out a thirty-five thousand dollars per home in terms of light rehab, that isn't really a construction loan per-se, but certainly to let you know about that. Now, once you have all your ducks in a row and you're ready to go out there and find the ideal financing, several elements that you're going to want to be consciously aware of, and in fact I call them seven wonderful tips. Tip number one, maximize your credit score. Just like a regular loan, you'll want to maximize your ideal loan in terms of your FICO score, lenders will definitely look at that, and that's going to result in a much more attractive interest rate and terms that you'll get from the lender. Also I would recommend when you're ready to pre-qualify, don't go out and buy big ticket items, don't buy that Cadillac, don't buy that boat, don't buy those Seiko watches or those expensive items there in terms of a subzero refrigerator, keep it very tight and keep it very prudent. Lenders will be looking at that in terms of the underwriting perspective. Secondly, and this is almost repetitive, but it comes down to credit and equity. We're in a situation right where construction lending is much more conservative in 2011, 2012 period. They will scrutinize you very, very closely, so be conscientious of that. Item number three, you will need a construction contract. Now a construction contract is different from the loan application. A construction contact is actually a contract between you, yourself, the borrow, and the actual builder of your piece of property. This is bank required element. Underwriting from the banks will want to see an actual executed construction contract. Item number four, make sure the architectural schematic plans are executed as well. I can not imagine, and I certainly advise not a client of mine to go to seek a construction loan and you don't have architectural plans. Item number five, and this is to be conscientious in terms of your pre-qualification period for a mortgage home, make certain that you avoid the bait and switch. The bait and switch in real estate brokerage mortgage financing is, typically occurs when a well intention borrower, speaking with a loan officer, even a construction loan officer, and it seems like the terms and rates are just way too good to be true, it probably is in fact. And the fact that there are no fees and points, you can probably expect a higher interest rate on the back can. So be conscious of that, they can absolutely kill your gill. Item number six, higher a good builder, one who has insurance. Now this is bank required, it may not be state required but there's certain elements insurance that are going to have to be in place. Not only are you a potential liability as the borrower, but also your builder, and those that give the money out will be conscientious of whether or not you're working with a credible builder that has insurance and has a positive track record. Lastly, it comes down to loan application, and this is what I call, keeping your game tight, really. And that is when you're working with your loan officer, who agrees in construction loans, make certain that, that loan application does not have any loose ends, that there's no derogatory credit items on your credit report, that your income and the pay stubs that you're presenting are actually in tact. You certainly don't want to present a less than decorous element about yourself, certainly that might even be reflective of the process when it comes to paying back that construction loan. So with that in mind, let me just close with that, this is what banks look for. They look for a very well constructed 10-03 loan application, which is the Fannie Mae form number that you'll apply for. It will actually have a box that will say, construction loan, they'll notch that off at the top, they'll look for compensating factors why you make a good credit risk. And lastly, they have what they call, story loans. a story loan is what's your story. What, when, why, how, and how you plan to repay this debt, and what's the story behind the loan. Good thing to serve this up nicely, maybe consider attaching a letter to your loan application, that gives a little bit of contactual background to who you are and what you want. With that, I hope these seven items were very helpful. This is Sidney Potter, from Potter Equity's, Pasadena, California, I thank you for your time, I wish you well, and I'll see you at the finish line.


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