Mortgage Finance Notes
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What
You Need to Know Upfront
from www.b4ubuild.com:
are
you really ready to build your dream?
how
much does it cost to build a new house?
where the construction is based on a custom design
and individually built for the home owner
where the construction is based on 3-4 different
"production" designs for a particular
neighborhood.
The homeowner may buy one of the plans from the
builder and construct the house as specified.
Some production plans allow for structural changes
at additional cost.
Understand the steps
needed:
- Can you afford building your home? Can you qualify
for construction financing?
These questions are reviewed in this file starting
with: Calculating the Numbers.
- Define the project requirements. How many rooms,
what is the square footage, how should the rooms
adjoin?
- What kind of foundation do you need
- Where to find the lot and neighborhood
- What kind of home style are you looking to build
- You need to search or custom design your house
plan
- You need to setup the construction specification
sheet
- You need to find a contractor to price the project
- You need to get bank approval for the construction
project
- You need to manage the project
- Stay within budget
- Close on the construction financing / mortgage
loan:
Review house plans and other architectural plans
online:
see our Step 2 plan
for building your home
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Notes: Home
Construction Financing
You will need to qualify for a construction loan before
meeting with a builder. The construction loan will
have a set limit that you can borrow (based on your
qualifying ratios: see Step 5),
which will determine the expense of your construction
project in addition to the up front money that you
will invest in the construction.
There are basically two types of loans involved:
This is a credit line that the lender setups on
your behalf for the payment of contractors and supplies
during the construction phase of your home.
Cash disbursements may vary by lender. Typically,
the first disbursement buys the land and then successive
disbursements will be made when certain phases in
the construction project have been completed.
Most lines have a term of about 12-18 months, depending
on the size of construction and area. Some lenders
will offer an extension if needed, but often with
up front penalties.
You will pay interest on the amount that you borrow
from the line during the construction phrase. The
interest rate on construction lines are slightly
higher than residential mortgage rates.
At the end of the construction phrase, the line
closes and the amount borrowed is paid off with
a mortgage loan of your choice.
Many lenders offer the combined construction line
and permanent loan as a bundled product. There are
advantages and disadvantages. See
our discussion on construction/permanent loans.
If you are unable to obtain the combined construction/perm
loan with the same lender, you will need to:
- first qualify for long-term financing (i.e.,
mortgage loan) with one lender and then,
- meet with a second lender for the construction
line of credit — these lenders will typically
extend credit once you have the permanent loan
arranged.
Mortgage lenders expect owners to use a portion
of their own money to finance their home construction.
The standard percentage varies, but averages range
from 5-10% or more of the home's future value (as
determined by the lot, construction plans, and independent
appraisal).
Some lenders now allow for lesser percentages —
as little as 3-5%, provided that you have good outstanding
credit.
Existing homeowners often use the equity value
of their existing home as required up front money
for construction loans. They may take out a home
equity line of credit to pay the up front money
or a percentage of the estimated construction cost.
For more information about home equity lines: see
our site at YourEquity.Com
Note: IRS rules allow for an one-time distribution
from qualified IRA accounts without the 10% penalty
for acquisition of a home for first-time home buyers.
See IRS publication 590 for information:
http://www.irs.gov/formspubs/...
We quote from the IRS
web site:
401(K) Plans
Question:
Can I withdraw funds penalty free from my 401(k)
plan to purchase my first home?
Answer:
If you are less than 59 1/2 years of age, you cannot
withdraw funds from your 401(k) plan to purchase
your first home without being subject to a 10 percent
additional tax on early distributions from qualified
retirement plans.
However, depending on the rules for your 401(k),
you may be able to borrow money from your 401(k)
to purchase your first home. Your plan administrator
should have written information about your particular
plan that explains when you can borrow funds from
your 401(k) as well as other plan rules.
References:
Topic
424, 401(k) plans
IRAs
Question:
If I can't withdraw funds penalty free from my 401(k)
plan to purchase my first home, can I roll it over
into an IRA and then withdraw that money to use
as my down payment?
Answer:
Yes, if you are receiving a distribution from a
401(k) that is eligible to roll over into a IRA
and you meet all of the qualifications for an IRA
distribution for a first-time home buyer. Your plan
administrator is required to notify you before making
a distribution from your 401(k) plan whether that
distribution is eligible to be rolled over into
an IRA.
To see if you qualify for a distribution to be used
as a first-time home buyer, refer to Publication
590, Individual Retirement Arrangements (IRAs) (Including
Roth IRAs and Education IRAs).
Discount points are up front fees that lenders
charge in order to offer you a lower interest rate
on your permanent construction mortgage.
A point equals 1 percent of the mortgage loan amount.
For example, if the lender charges 2 points on an
agreed loan amount of $100,000, your point fees
will be $2,000.
Many lenders offer mortgage loans with zero points.
These products generally carry a higher interest
rate.
Typically, each point that you pay on a 30-year
loan lowers your interest rate by 0.125 of a percentage
point. This reduction may vary by lender.
Compare rates vs. points calculation - from Dinkytown.net:
http://www.dinkytown.net/
Closing costs are incurred costs associated with
the closing your home construction loan. There
could be closing costs for the construction line
and additional costs for the permanent loan, especially
if you use different lenders for each product.
These costs include lender fees, prepaid fees,
title search, recording fees, surveyor's fees,
attorney fees, and other closing-related fees.
You will find a more detailed
discussion under Step7.
Closing costs can average about 3-5% of the total
construction cost, including points.
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It is highly advisable that you set aside a cash
reserve account before starting your construction
project.
You may need this "extra" money for
building deposits, cost overruns, construction
changes and requested upgrades.
There are too many "horror" stories
of construction projects coming to a stop because
of the lack of funds. Review
Step 6: Managing Construction Costs.
Many homeowners will use the equity value in their
existing home to open a home equity line of credit
as their cash reserve account. In the event of
extra cash needed, they will draw upon their equity
line account for cost changes.
Caution: your existing
home equity value may be needed to close on your
residential mortgage. Make sure you run the numbers
to determine how much equity can be set aside
for your cash reserve account.
in the event your construction costs exceed
plan*:
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Calculating
the Numbers
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Tax Benefit
of Home Ownership
IRS-related publications and
forms for homeowners:
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Getting Yourself
Pre-Approved
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You will be able to make an offer knowing exactly
how much you can afford. Also, if the seller knows
that you have been pre-approved for a mortgage loan,
your offer will be more attractive if the seller wants
to sell fast.
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Nor does it obligate the lender to provide you a mortgage
loan.
The pre-approval simply reviews your credit and income
qualifications based upon the information supplied.
The final approval will require verification of your
financial status and home purchase
so that yoWith a pre-approved mortgage,
you can get most of the paper work completedu can close on your home as soon as possible.
We can help get your pre-approval application started.
Search
our financial network.
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Qualifying
for Credit
Lenders typically use two key criteria in qualifying
you for credit:
your capacity to repay your loan is analyzed by two
lending ratios:
calculated by dividing
monthly housing expenses by your gross monthly
income. As a basic rule, the housing ratio should
not exceed 28%.
calculated by dividing
your fixed monthly expenses by your gross monthly
income. As a basic rule, the debt ratio should
not exceed 36%.
Calculate your own ratio: see
our ratio calculator
your outstanding credit report lists any payment delinquencies
that you may have had over the past three years.
The report can be a factor in a lending institution's
decision to approve or decline your mortgage application.
You should review your credit report for any errors
before applying for a mortgage.
Allow yourself about 2-3 months prior to the loan
application for correcting of any errors that may
be on your report.
You have the right under Federal Law to know what
is in your credit report.
We invite you to visit our Credit/Debt
Management Center for complete information about:
— all
about credit
— building
and sustaining a good credit report
— what's
in the credit report
— obtaining
your credit report for review
— making
corrections to your credit report
— budget
management
— reducing
your monthly expenses
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