The Money Mustache Community
Learning, Sharing, and Teaching => Ask a Mustachian => Topic started by: Jmoody10 on December 11, 2015, 10:09:47 AM
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For the last two years (or so), my wife and I have been building our house. So far, we have paid for this through a mixture of personal savings and a construction loan. We owe $98,000 on the construction loan to a local bank. We can borrow up to $164,000 at 5%. We should have enough cash to finish the house.
We own 22 acres - 1.1 acres of this lot was used as collateral for the construction loan. We couldn't do a construction to permanent loan at first because we didn't have an exact finish date and had zero/low credit.
In the next 4-6 weeks, we will be ready to apply for our mortgage. Both of us our first time home buyers and we have a few questions. Our financial state is also below (if it is needed)
Questions:
1. Because we don't have an exact finish date, does it make sense to apply at for a mortgage at other banks besides the local bank?
2. When applying, will the lot that was used for collateral count toward the down payment? Will the cash that we've put into the house count toward the down payment?
3. In the next few weeks, would it make more sense to use our remaining cash to finish the house or borrow the difference? The difference would be around $15,000
4. Anything special about going from a construction loan to a mortgage?
5. Anything else I should know or do?
Financial State:
Age: 26 (me), 25 (wife)
Location: South Georgia
Gross Salary: 4666 (me); 1058 (wife); 5724 (combined)
Side work: 1266 (me - average per month)
Assets: $212,500
Cash: $21,500
Land/House Tax Value: $135,300 (unfinished house accessed really low)
Cars: own two used priusi (rough value about $15,000)
IRAs: $9,800 (spilt between two accounts)
Teacher Retirement Accounts: $28,000
HSA: $2,900
Liabilities: $112,840
Construction loan: $98,448
Wife Student loans: $14,392 (In-laws pay this. Wife and Father in law are the borrowers on the seven loans)
Credit info: No long history - nothing bad either.
Score credit karma: 748 (me) ? (wife - credit karma can't find anything without us mailing in documents to validate identity)
One joint credit card with $7300 limit
Oldest account is two years.
Thank you all so much for any help!
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1. Because we don't have an exact finish date, does it make sense to apply at for a mortgage at other banks besides the local bank?
I don't think any of the banks will approve you until it's done, but they should all be willing to at least pre-approve you based on your financials and estimated values. Full approval will require an appraisal, and getting the best financing will require the home be complete or at least very close.
2. When applying, will the lot that was used for collateral count toward the down payment? Will the cash that we've put into the house count toward the down payment?
Don't think in terms of "down payment". Think "equity". Equity will be calculated based on the appraisal, not what you've invested. Or flip it and think of loan-to-value (LTV), which is the percentage of the market value that you are borrowing. If you did this cheaply, you could theoretically borrow more than you invested and still only have an 80% or lower LTV, which gets you the best rates, no PMI, etc.
Is your 22ac subdivided? If the 1.1ac is the lot the house sits on, its value will be considered. If it's a separate parcel, then no.
3. In the next few weeks, would it make more sense to use our remaining cash to finish the house or borrow the difference? The difference would be around $15,000
I don't think it matters a lot, since it sounds like you have a ton of equity and you'll be able to pull back out whatever you need to. I'd look at this the other way: how much do you want to finance in the end? If you're OK with a mortgage for $113K, and you prefer to keep that cash for investments, borrow it now. If you plan on leaving it tied up in equity, pay cash and have a smaller loan. This is fundamentally no different than debating whether to pay down a mortgage balance or invest in the hope of higher overall returns.
4. Anything special about going from a construction loan to a mortgage?
5. Anything else I should know or do?
**financials**
I'm not a lending expert but your numbers appear sound... I strongly suggest getting at least 3 quotes, preferably at least 1 from a mortgage broker, because they often have lender credits to help offset closing costs, etc.
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Thank you for your advice, zephyr911! The whole equity thing makes a lot more sense now and we will get the home as complete as we can before the appraisal now.