How to build before selling old house?

[Juliah]

DH and I would like to build a house. We will have almost half the cost of the new house once we sell our current house (even after paying off the current mortgage).

However, because our DDs are disabled, it would be very difficult to sell the current house and move to a temporary place while building. In fact, we'd like to be in the new house a month or two while we paint and patch the current place before we put it on the market. Would a bank somehow take into account the value of the house we'll be selling in calculating the construction loan/mortgage for which we would qualify? Would we still have to have a significant cash down payment since we haven't sold the old house yet?

Also, we are self-employed, so our income varies. How would a bank take that into account when qualifying us for a mortgage?

Thanks!

 

[ducklite]

There are three ways of approaching this.

1. You can refi your current mortgage and take cash out (and because you'll be out of there soon enough you could take a 1/1 or 3/1 ARM to get a low rate.

2. You can take a 2nd mortgage or HELOC, the difference USUALLY is a 2nd mortgage has an immediate principle and and interest payment, a HELOC USUALLY only pays interest for five years and then balloons. This could help keep you rate down.

If you do either of these two DO NOT tell the bank you are getting ready to build a new home.

3. You can take a bridge loan. This is usually a term of one year when you are building new construction, and it's interest only on the payments. I'm not a big fan of bridge financing under most circumstances, unless you've got either a guaranteed buy out as the result of a relocation package or have the cash in reasonably liquifiable investments as a back up.

4. Some builders only require you to put a few thousand down as long as you can show you've secured end financing. These are usually the production builders building tract homes--Lennar, Ryan, K Hovnanian, Levitt, etc. Usually to secure the mortgage you need to show a purchase contract for the house your selling as a closing condition--unless you can handle both mortgages in your DTI ratios.

The value of the current home will be taken into account, depending on a lot of factors you might be required to get an appraisal if you haven't listed it.

Unless you are doing a no income verification loan (high interest rates and generally require high credit scores) you will be required to submit your tax returns for the past two or three years. They will take your adjusted gross income averaged over 24-36 months. If your daughters receive SSDI and are under a certain age (I can no longer remember what it is) they will either use that or use it as a compensating factor.

I hope that answers some of your questions, let me know if you ahve others, I'll try to answer them.

Anne

 

[shelly3girls]

When we built our house we did not have a mortgage on our existing house. We took out a home equity loan on the current house instead of a mortgage b/c there are no fees to do so. We then made settlement on both houses on the same day so that we paid off the LOC and started the new mortgage on the same day. I guess if you didn't want to settle at the same time you technically would have to be able to carry both mortgages to qualify. We were not sweating it b/c we could carry both mortgages if we had to just in case the sale of our house fell through. If this was not the case I think I would have been quite nervous.

 

[majimikate]

This is just a cautionary tale....

I (before my last 3 kids were born) was a banker, familiar with mortgages, DTI ratios etc. We live in NY, the housing market was going through the roof, and we deiceded to sell our house of 10 years and build. We do well on our house, walk away with substantial downpayment, then come into a buyer for the business we own as well. (At the time we owned our own business and my husband worked full time as well) We buy the land etc., sign contract with the builder, house is designed and we break ground. Just for starters, we hit rock on the first day within the first hour. This was just the beginning!!! We ended up $50,000 over budget, (blasting, rock hammers, and the other subs who were delayed by other work that needed to be done first, which leads to extra interest payments) which thank God we had, but we did not do all we wanted with the house and the yard. Just be prepared for the inevitable, it will cost WAY MORE than you think, and there will be costs you never thought of that will be significant. Be careful what type of loan you choose as well. Your options will be fewer as you are self employed so really research mortgage products before choosing.

We have been in our house for a year and a half and it's beautiful and I love it. I would do it again, even after this experience. Just go in with your eyes wide open, and GOOD LUCK!!!

 

[ducklite]

That's some good advice. We also went way over our original sales price (which we had based our mortgage on), because we hadn't thought out our upgrades really well prior to closing on the construction loan. $40K out of pocket later... The motto is to really, really think things through before you sign on the dotted line. If you are going to want to upgrade landscaping, cabinets, carpet, tile, energy saving items, appliances, fixtures, front entry doors, lighting, or anything else, put it in the priginal plans.

Anne

 

[Juliah]

Thanks for all the great information!

I hadn't thought about the bank looking at SSDI. Do they look at the income of everyone living in the home? We are planning to build a second MB or apartment attached to the house for my DM, who is getting older. So would her income be included--or only if she will have part ownership of the house?