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.

NAIHBR Opens East Coast Office in Washington DC

NAIHBR continues to grow. We are proud to announce the expansion of the NAIHBR organization to the North Virginia and Washington DC area with our east coast chapter located at 1300 I Street NW Suite 400E, Washington DC, 20005. NAIHBR has partnered with key sponsors like EverBank and National Mortgage Insurance (MNI) to organize a Leadership Summit that will be held at the North Virginia Association of Realtors headquarters in Fairfax Virginia on July 26th, 2018.

Key topics for the event include…

  • Local Market Overview by Industry Experts
  • Financing options for new construction and renovation, that Pay Commissions Upfront
  • High-tech solutions to connect Realtors to today’s buyers and sellers
  • Launching of the 3/2 Program that triples commissions and doubles marketing opportunities by bringing the real estate and construction communities together to sell more new homes and help builders secure construction projects.
  • Introduction of the Homebuyer Benefit Program, which gives NAIHBR Preferred Members up to $550.00 of valuable home improvement credits and services to provide to as many of their buyers and sellers as they wish – unlimited use!
This event is sure to be a full house, so interested attendees can reference this EventBrite link to register and reserve their seats:
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We are excited to expand NAIHBR to yet another market, and hope to see you in Fairfax!

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.

NAIHBR Expansion Set for Fairfax/DC Market

As NAIHBR continues to grow, we are proud to announce the expansion of the NAIHBR organization to the North Virginia and Washington DC area! NAIHBR has partnered with key sponsors like EverBank and National Mortgage Insurance (MNI) to organize a Leadership Summit that will be held at the North Virginia Association of Realtors headquarters in Fairfax Virginia on July 26th, 2018.

Key topics for the event include…

  • Local Market Overview by Industry Experts
  • Financing options for new construction and renovation, that Pay Commissions Upfront
  • High-tech solutions to connect Realtors to today’s buyers and sellers
  • Launching of the 3/2 Program that triples commissions and doubles marketing opportunities by bringing the real estate and construction communities together to sell more new homes and help builders secure construction projects.
  • Introduction of the Homebuyer Benefit Program, which gives NAIHBR Preferred Members up to $550.00 of valuable home improvement credits and services to provide to as many of their buyers and sellers as they wish – unlimited use!
This event is sure to be a full house, so interested attendees can reference this EventBrite link to register and reserve their seats:
reduced image finger with magnifying glass
We are excited to expand NAIHBR to yet another market, and hope to see you in Fairfax!

NEW Preferred Membership Program!

Thank you for being a part of the National Association of Independent Home Builders and Remodelers (NAIHBR). As a member, you know the value of partnering with the building and lending communities to differentiate yourself from other brokers and better serve your clients.

Our mission is to help YOU better serve our communities through our network working together. I’m excited to announce our new, Preferred Membership program!

At NAIHBR, our base Realtor memberships are free. There is no cost to you, to be part of our organization which includes newsletters, invitations to leadership summits, and opportunities to engage with the thousands of our membership.

Our NEW Preferred Membership Program offers the following:

• For each one of your clients, we will provide you $100 of handyman credits that you can give to each your buyers and sellers. There is no limit to how many, and this is another great way to differentiate yourself from other brokers in your market.

• For each of your clients that are moving, we offer a $350 valued moving concierge service that can handle all aspects of a stressful move. Your client gets their own US based representative to help them 24 hours a day, 7 days a week!

• For each transaction, that is a total value of $550 that can be given to your clients with no limit per year.

• In addition to the Moving/Handyman Credits, we also include access to the NAIHBR 3/2 program….allowing you to triple your commission and double your listings for open lots and teardowns. We will waive the $495.00/transaction administrative processing fee for Preferred Members.

• For each membership, we will be providing H.O.M.E DuPage and Habitat for Humanity a donation from NAIHBR (keeping with our spirit of giving back and investing in our local communities).

• You will also continue to receive access to our newsletters, invitations to leadership summits, and access to sponsored technology and product solutions.

Preferred Membership is just $49.00/year, which will be a key part of financially supporting our community based professional trade association.   Please click on the following link to get details on this latest membership offering!

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“It’s Too Expensive” and Other Construction Myths

Many potential home buyers shy away from buying new construction homes because they have bought into the pervasive myths about the cost and process. But building a new home is less expensive and less stress-inducing than you might think. Here is the truth about common new construction myths.

“It’s too expensive”

The idea that new homes are more expensive than existing homes is easily the most common myth about new construction. New homes get this reputation because they are typically larger than existing homes. Your builder can design a home that fits your budget. Plus, most new homes are much more energy efficient so you will save on your energy bills in the long run. You also don’t have to worry about the unexpected expense of repairing a leaky roof or decrepit plumbing.

“You Can’t Build in Winter”

Yes, winter construction is a thing. No, building materials won’t get destroyed by snow; they’re treated to withstand the elements.  Yes, concrete treated with calcium chloride to help it cure in cold weather is just as strong as concrete poured in warm weather. All concrete must meet strict building code requirements so you shouldn’t be concerned about the quality of concrete surfaces. As long as the foundation is in place before the ground freezes, you can still complete a project in winter months.

New Homes Lack Character and Charm”

A new home doesn’t need to look like a cookie-cutter house. Custom homes can be designed to include beautiful and unique architectural details, tall ceilings, wood-burning fireplaces or other charming features that make it yours.

Builders Never Finish on Time and Always Go Over Budget”

While there is not much builders can do about Mother Nature, most reputable homebuilders today have processes in place to ensure that your home is built in a timely manner and under budget. Your builder should provide you with a detailed pricing sheet that lays out the costs for labor and materials. He should also communicate regular updates so you understand the process and timelines.

NAIHBR is a not-for-profit trade association brings together homebuilders, contractors, real estate professionals, lenders and suppliers to promote development of new construction and home renovations. Our members have a strong interest in building value in their local communities. For more information or to join NAIHBR contact us at 855-733-8100.

Proposed Kitchen Remodel

Identifying a Complete Home Cost

Many buyers are intimidated by the construction process because there is a concern that there are unknown costs and that these costs can easily get out of hand. Real estate professionals working in the NAIHBR program should be aware of the costs that make up a complete new home price, and be able to walk clients through the different pieces that make up the total cost. These costs fall into 3 categories - the lot cost, hard costs and soft costs.

Lot Cost

The lot cost is very straightforward, it is the cost of the property itself. It may be a vacant lot or have an existing home on it, but the property as it is being conveyed by the seller as-is, is the lot cost.

Hard Costs

Hard costs are the cost for building the home itself. It consists of the “sticks-and-bricks” and entails all the actual material and labor to build the physical home.

Soft Costs

Soft costs consist of an array of additional expenses associated with the build. Many of these costs are specific to the site itself, like the cost to demolish the current home or remove trees that are in the area of construction. Other site specific soft costs include the engineering of the new home on the site and installation of utilities to the new home, like new sewer & water service, gas service and electric service. There are also soft cost expenses that are specific to the type of home being built, and the municipality where it is being constructed. These expenses include the permits, impact fees, bonds, as well as other specific requirements for new home construction that may be required in that particular town. An example of this would be the interior sprinkler systems that a handful of municipalities now require.

There are also soft cost expenses that are specific to the type of home being built, and the municipality where it is being constructed. These expenses include the permits, impact fees, bonds, as well as other specific requirements for new home construction that may be required in that particular town. An example of this would be the interior sprinkler systems that a handful of municipalities now require.

Summary

Coming up with an accurate soft cost number in not an easy process, and typically takes several days for a builder to provide. It requires research, as well as the bids of several subcontractors to help identify these specific costs. NAIHBR provides models and pricing for the hard costs (sticks-and-bricks) and adds them to the lot cost for the property in question. Then, this price is marketed on the MLS with the disclaimer that the soft costs are not included, and an analysis of these costs can be provided by the builder when requested. A buyer or their agent can make this request through NAIHBR, and the results of this request would need to be added to the advertised MLS price for a complete home cost.

family contract

3 Key Ingredients to Spur New Construction

Dallas, Texas is on track to build 48,772 new homes in 2017 while Allentown, PA will build only 436. So, what causes some cities to build so aggressively while others stagnate? The size of the city plays a part, of course but according to a recent study by Trulia, job growth, income growth and home price appreciation are the three key ingredients needed to spur homebuilding.

Job Growth

Increases or decreases in job creation have the strongest impact on demand for new construction. As people move to a new city for jobs they will need housing, of course. A steady income makes them feel financially secure enough to buy a new home. According to the study, for every 1% increase in job growth, there is a 5% increase in home building permits. In Denver, for example, employment grew by 16.3% between 2010 and 2016 and homebuilding grew to 56.2% above its historical average in 2017. Had employment increased by an additional 1% to 17.3%, homebuilding would be more like 61.2% above the historical average.

Income Growth

There is also a strong correlation between income growth and increases in new construction. It makes sense that as people earn more money they can save more for a down payment and feel comfortable that they can afford upgrading to a new home. When the average income of a metropolitan area increases by 1%, you can expect the number of new construction permits to increase by 2.1%.

Home Price Appreciation

Rising home prices typically signals strong demand which incentivizes homebuilders to build more homes because they know that 1) homes will sell quickly and 2) they will earn lucrative profits. In fact, Trulia estimates that for every percentage point increase in home prices, there is a 1.2% increase in new construction. This only occurs, however, when incomes grow along with home prices. If incomes fall or stagnate while home prices rise many buyers are priced out of the market and construction permits slow.

NAIHBR is a not-for-profit trade association brings together homebuilders, contractors, real estate professionals, lenders and suppliers to promote new construction and rehabilitation. Our members have a strong interest in building value in their local communities. For more information or to join NAIHBR contact us at 855-733-8100.

new home construction 1900

NAIHBR New Construction Homebuyer Services – A Great Place to Start

NAIHBR New Construction Homebuyer Services – A Great Place to Start

As NAIHBR members, you know about the great marketing services that NAIHBR can provide you and your sellers, but did you know NAIHBR can help you with your BUYER clients as well? Lately, many of our Realtor members have been sending their new home buying clients to us first, before starting the process of finding a lot or a builder. Here are some of the reasons why so many of our members are registering their clients with NAIHBR:

1. NAIHBR agents have access to exclusive properties not found on the MLS. Provide your clients the best selection of properties and bring value other agents cannot.

2. Your clients deserve a choice! NAIHBR will provide them several builders to select from, providing them real options for their new home build. They can choose the builder that is right for them and have a choice regarding everything from the style of the home to the price.

3. You work hard for your commissions, protect them. NAIHBR members who have their clients registered are ensured of receiving their real estate commissions, because NAIHBR builder members agree to work with the real estate community. No more wondering if a builder will try to bypass you or renegotiate your commissions.

4. Get paid now, not when the build is complete in 12 months! With NAIHBR’s special arrangement with the area’s best new construction lenders, all real estate commissions are paid up front, before the build even starts! It is new construction agency, done right.

5. New construction, and all of the variables and decisions associated with it, can be complicated. Having a NAIHBR expert that has been through the process many times before makes it much easier. Leverage NAIHBR’s extensive experience to help guide your clients through the process and make it go smoothly for both them, and yourself.

6. Additional buyer leads are nice, especially when they are looking for a new home and lot package. At NAIHBR, we are introduced to new construction homebuyers all the time. When they are looking for a quality agent, we go to the list of NAIHBR buyer agents who have registered their clients with us in the past. These are the agents committed with working with us, so we reward them with the home buyers that are brought to NAIHBR who are unrepresented.

NAIHBR is here it help you and your clients make the best of their new homebuilding experience. As NAIHBR Association members, we are here for you.

Register your new construction buyers today! It is easy. Just go to www.naihbr.org/register-new-construction-buyer-opportunity to register your buyers and take advantage of all the NAIHBR’s benefits today!

To Renovate or Demolish, That Is the Question

Whether you are contemplating renovating your current home versus buying a teardown or trying to decide what to do with a fixer-upper, the renovating vs demolishing question is rarely clear cut. The cost of one over the other varies from case to case. Here are a few factors that you should take into account to determine when to renovate and when to demolish.

When to Renovate

Preserving Vintage Details

If your home has historical attributes or original details that you want to keep, it may be wise to renovate. Vintage features like solid-core doors, arched doorways or marble windowsills are hard to come by today and often can’t be replaced by new construction.

Historic District Restrictions

If you live in a town or neighborhood that is designated as a historic district you may not be allowed to demolish and may be forced to renovate. Many older communities have restrictions in place to preserve historical buildings and protect the character of the town. In some places, you will need to get special permission from the local historic preservation commission to demolish and rebuild. Those can often take much longer to obtain than renovation permits and aren’t worth the trouble.

Considerable Cost Savings

If the scope of the renovation is limited enough that it is considerably more cost effective, renovating is probably your best option. Keep in mind that renovation costs are almost always higher than you anticipate due to unexpected issues like electrical or plumbing problems, mold or structural defects. You should leave some extra room in your budget for unforeseen expenses.

When to Demolish

Major Structural Issues

If the home has major structural issues it is almost always smarter to demolish the home and completely start over. Things like crumbling foundations, mold, pest infestations, or cracks in the walls are typically more expensive to repair. Water damage from a flooded basement or a leaking roof also is a major issue that is often not worth fixing.

Cost and Potential Appreciation

If the investment in new construction increases the value of the home enough to outweigh the demolition costs, then demolition is most likely your best bet. Demolition typically costs about $8,000 to $15,000 depending on the location and the size of the property. Generally, it is worth it to tear down the home if the new house can be valued two to three times as much as the original home. The price of the newly built home largely depends on the location and the current prices in that market. So it is important to know the sales prices for comparable homes in the neighborhood and set your budget within those parameters.

NAIHBR is a not-for-profit trade association brings together homebuilders, contractors, real estate professionals, lenders and suppliers to promote development of new construction and home renovations. Our members have a strong interest in building value in their local communities. For more information or to join NAIHBR contact us at 855-733-8100.

NAIHBR
NAIHBR National Association of Independent Home Owners and Remodelers

Contact Info

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(855) 733-8100
[email protected]

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