Contracting Part VI: Working with Banks and Mortgages

Banks and MortgagesLet’s discuss some simple tricks of the trade for dealing with banks and/or mortgage firms. By the time you’re ready to discuss your project with the bank, you will already have a full set of plans, an accurate price estimate, and a well planned critical path. All of these details are absolutely necessary to have in place and they must be accurate and complete. Remember, the money you request will be “set in stone” once you close the loan. The same is true for the time period in which you promise to complete the project. Be sure you get the details right from the start or you will end up paying heavily in fees to reorganize the loan.

Don’t Guess… Prepare

Banks and NumbersThere is a common saying that the banks and mortgage companies “hold the key to your house”. Well, in fact they hold the whole darn house, not just the key. Whatever the scope of your project, if you get a construction loan, you’ll most likely use the property itself as the collateral. That means if something goes wrong along the way such that you can’t pay the mortgage, the property will go back to the bank. Scare tactics aside, get your numbers straight. Make sure you have enough time in the loan to complete the house (realistic time frame from your critical path, not your hopes and dreams of a move in date). Make sure you have enough money in the loan as well when you talk to the banks. Know what you are signing!

No Stupid Questions

Banks and ContractsThe banking and mortgage industry has changed dramatically in the last few years. Be sure you know what the fine print on your loan documents says. Be aware that pre-payment penalties, adjustable interest rates, and other fine line details can ruin what seems like a good mortgage. Talk to your loan officer and ask as many questions as you possibly can. There are no stupid questions. The only thing “stupid” is signing a document you don’t fully understand.

Appraisers and Comparable Sales

When working with alternative construction techniques such as straw bale construction, the biggest roadblock will be comparable sales. These are homes in a designated area that have sold in recent months that fit a similar description of your home. Details like the number of bedrooms and bathrooms, and the type of construction are used to make resale value predictions. This allows the banks to decide if the home is marketable should you default on the loan.

The reality is, you will likely not find a bunch of straw bale homes that have recently sold in your area. The reason for this is actually good news. People can’t find comparable sales because people who build straw bale homes, almost never move out! The homes are so loved by their owners, that they are not resold. This detail is actually helpful for you as you talk to your bank and/or appraiser. Make sure they know this fact. Also, let them know that any alternative house can be considered in the appraisal. This means log homes, earthen homes, and so on. That increases the pool of options they can look at. Finally, be sure they know about International Residential Code Appendix S that specifically legalizes straw bale construction from a building code perspective.

The Details…or at least SOME of them

Banks Loans ApprovedBe sure to give your bank good details about the home without telling them more than they need to know. You can discuss the fact that you’re building with bales, but keep things as simple as possible so that you don’t raise any red flags for the banks. Let them know your plans and give them detailed drawings that show you know what you are doing. Prove to them that you are on the ball and aware of all the stresses and hurdles that lie ahead. Show them you are ready and they will respond well. Keep in mind that as an owner builder, you will likely have to put down a larger deposit than if you hired a contractor to build your house, To the bank, you doing the work is actually a risk for them and so they make you pay more up front.

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