Chapter 3: Getting a Construction Loan

Once we submitted the construction documents and contract to the banks, the mortgage qualification process began. We had already received pre-qualification so we thought this next phase would be easy. It was treacherous.  

At this time we started to feel uncomfortable about our basement design being split with a crawlspace, especially my wife who was having bad dreams about crawl spaces. I spoke to my neighbor who started building across from us and he told me what it cost him to dig just for a slab on grade and come to find out, it was likely going to cost only a little bit more to just dig a full basement then deal with the whole half-crawlspace nightmare. And mechanical would have been a ridiculous joke trying to run ductwork from a basement into the crawlspace. And it’s so much easier for maintenance and access to mechanical to have the full basement.

We also realized that it would raise our appraisal value a lot to have the full basement, especially with it being partially finished and would help close the gap between the cost to build and the appraisal value. So, we paid the architect, again, to go back to the plans and convert the half basement into a full basement. The reason why we had only a half basement is because our builder encouraged it back when we discovered we were way over budget. He thought the biggest savings would be in shrinking the basement. So after adjusting the plans we had to resubmit the budget and the construction plans to the bank and start over.

We were on the home stretch! The hard part was behind us until…

About a week or 2 after we submitted everything, our loan officer called with bad news…he told us that our builder was on their “Don’t Build With Again” list. Apparently lenders have those types of lists with to track builders they’ve had problems with. There was an issue with our builder a year prior with another home build project regarding a roof leak and lawyers had to get involved, which put him on the list. We should have seen that as a huge red flag not to work with that builder, but we didn’t. We contacted the builder and asked him about it and of course his side of the story painted himself as completely innocent and we sided with him. Part of why we sided with him was because of our hastiness to get started, thinking our window of opportunity would close soon, so there wasn’t time to find another builder.

At this point, the bank gave us a choice to either find a new builder or do owner build and we could sub-contract our builder to manage it. The problem with owner build is that we had to put an extra 5% contingency in the budget, which we didn’t have the space for and make a 10% downpayment instead of 5%, which we couldn’t afford to do. But our loan officer went ahead and converted our application to Owner Build anyways just to keep the process moving while we figured things out.

A week later our builder called and told us he spoke to the bank and cleared his name. Then our loan officer called us and said that our builder had been approved and we could convert the application back to a normal contractor build. Yay! So we thought…

The next bad news came when the appraisal came in too low. It came it at $890k but we needed $930k according to our budget. And the bank wouldn’t lend more than 95% of the appraisal amount, not the budget. So, we went back to the budget again and couldn’t find anywhere else that could be cut. Instead, we submitted an appeal for the appraisal because we discovered that the appraiser forgot to include the basement as being partially finished, instead he listed it as unfinished. He also didn’t include some of the upgraded features of the home. The appeal worked and the appraisal was updated to $935k.

Now that our builder was approved and the appraisal was now high enough, we were in the clear right? Think again…

The next couple of weeks was extremely stressful with plenty of moments of thinking we weren’t going to make it through the qualification process and this whole thing would come crashing down. Roadblock after roadblock ensued. 

We went back and forth on several more renditions of the budget. The bank wanted more actual bids, and our builder was slow to get them. I also had some issues come up on my tax returns because of being self-employed. The bank was confused over my business income because my business name had changed, and I had 2 different businesses, and I barely received my tax returns for that previous year. And my business structure was confusing.

Also, the underwriter wanted to average my income from the last 2 years but 2 years ago my income was much lower than the previous year. At first, our loan officer was saying we could probably just go off one year, but the underwriter didn’t want to. After some back and forth and sending additional documents and letters from my CPA to show the solidarity in my income in 2023, the underwriter finally decided to go off just my income from the previous year, which was enough to qualify us for the full mortgage.

But we weren’t in the clear just yet.

We had to make sure we had 6 months of mortgage payments in savings and some of our savings included inheritance money from a grandparent, so that needed to be verified from additional letters from other people. There was constant back and forth with our loan officer, who was great by the way, on making sure we had enough money for closing costs but also mortgage reserves, all while the construction budget went through a couple more versions.

If the budget was accurate and thorough to begin with, and we had spent more time in the planning and design process, this mess could have been avoided. We had previous tasks that were piling on top of one another because the next step started before the previous one was complete. You must do things in their proper order to avoid chaos and do not rush the biggest financial investment of your life!

If I were an employee, this process would have been much easier. Banks are slow to recognize the legitimacy of self-employment. In my opinion, a W-2 employee often has more risk because if they lose their job, and many do, they’ll have no income for sometimes 6-12 months. With self-employment if you lose a client, chances are you’ll still earn enough to at least pay your mortgage and you can replace that client within a couple of weeks.

Anyways, we finally got to the point in early March where we officially submitted everything that was needed and just had to wait. If this didn’t go through by a certain date, we would lose the rate lock, and we were getting very close. And losing the rate lock would start the process all over again because interest rates had shot up one percent since we locked our rate. We got in there right during a dip down to 6%, but then it shot back up to 7% over that month. 

To made matters worse, our builder was already mobilizing his excavator even though we didn’t have final approval on the loan yet. This put unnecessary pressure on everyone. If you put a shovel in the ground before you close on the loan, the bank doesn’t get first priority for liens and that can get you in big trouble causing you to lose the loan.

I noticed an excavator parked on our lot and asked our builder about it. He said it was fine and to just let him know once the loan closes. Make sure if you’re building a custom home that you don’t let the builder park equipment on the lot before your loan closes because it makes it look like work had begun. What if someone from the bank had driven by the lot? That would have potentially sabotaged us closing on the loan. It was irresponsible of him to do that.

Also, once the excavator had equipment there, he wanted to get started ASAP because it was blocking him from starting other projects. But there was still no guarantee there would be funding until the loan closed and sometimes there are last minute delays.

On March 13th, the builder got started on excavation even though we hadn’t closed on the loan yet because we received final approval. Until you actually sign the papers, funding of the loan is not guaranteed so this wasn’t a smart move. Remember, final approval DOES NOT mean you have funding. On March 17th the loan officially closed after we signed the papers. A responsible builder would have known the risks of starting before the loan closed and prevented any work from starting. We didn’t know any better because we had never built a house before. Make sure you understand the laws and rules around liens so you can check to make sure your builder understands them as well. We were lucky there was no issues with the excavator to cause him to file a lien against the property or else he would have had priority over the bank. That was a gamble our builder was willing to take and shouldn’t have.

Over the next week, excavation plowed forward. On March 22nd, one final communication was sent regarding the engineering plans. I texted the builder asking if we needed to update the engineering plans to accommodate the lower roof pitch of the garage that our architect had adjusted. Our builder said he works directly with the truss plant on that and changing the engineering plans wasn’t needed. It turns out it was. The garage roof pitch ended up being higher than it was supposed to be because the engineering plans weren’t changed. More on that later but before officially transitioning into the construction phase of this story, I wanted to mention that there were multiple instances where our builder said things didn’t need to be changed in the plans and it ended up causing issues later. So again, take more time in the design phase to get all the kinks worked out before you begin construction.

 That aside, the excavation process went smoothly and was finished by March 24th. We visited the site after it was dug and it was exciting to see the process begin, and to see the footprint of our house dug 8 feet in the ground. The kids enjoyed walking around the big hole and seeing the big diggers and bulldozers. We naively thought the worse of this process was now behind us. Construction has begun and it’s smooth sailing from here! In the next chapter, we’ll cover our experience during excavation all the way until framing began.