Build your financing package, then worry about the construction


When you think about building a house, you're probably thinking about floor plans, kitchen appliances, bricks and shingles -- all the concrete items that translate a dream into reality. But there's another building block that should be subject to the same careful decision-making as half-bath locations, wallpaper and trim options. What's more, this other item comes first.

It's finding the money to build and then live in the house. And since most of us, let's face it, are not wealthy enough to pay for a house on our own, the financing generally involves some form of lending institution.

The money is usually divided into two parts: construction funds that you pay interest on and that you draw on at various specified stages of construction; and permanent financing that takes over once the house is complete and you have a certificate of occupancy.

The best way to finance is to find a lender that will make a construction loan, then convert it to permanent financing. Even if you have a mortgage lender you've worked with before and liked, and even if you could get a break on interest rates, splitting the construction and permanent financing between two institutions can lead to problems.

For one thing, you can save on fees by saving on settlements. If you split the financing, you're going to be paying some fees twice. And you'll also be faced with having at least two appraisals, one before construction begins, based on plans and land values, and one when the house is nearly complete. If the post-construction appraisal is lower than the original appraisal (and yes, that happens), you won't be able to get permanent financing for the house you have worked so hard to build.

Changes going on in the banking industry, including big regional banks buying up smaller local banks, mean that the rules can change overnight. Shop for a bank as you would for a contractor: check with family, friends or neighbors who have built recently to see if they liked their lender. Try to find a bank that isn't on the sale block, one that has been making loans in your neighborhood. Here are some things you might want to ask about when you're picking a bank:

* How many appraisals are required? Is the property appraised ** once at the onset of construction and again when it's complete? Or is the second inspection just to determine that the work was done according to the plans submitted at the construction phrase?

* Are appraisals done by a local appraiser who knows the area? Appraisers use "comps," or recent "comparable" sales, as benchmarks for property values, and an appraiser unfamiliar with the area could be comparing your lovely contemporary with a half-brick-front rancher across a busy highway. Appraisers try to keep at arm's length from homeowners, but if you think the appraisal is unfair, protest to the bank; you may want to do your own research and gather some comparables that really are comparable. A real estate agent can help with that.

* How long will your loan be held by the lender? Most lenders sell mortgages on the secondary market. You could start out with a convenient local branch where you can drop off payments, tax or insurance bills, then suddenly find yourself dealing with the voice mail of some unheard-of bank on the opposite coast. Some lenders may sell the loan but continue to service it, collecting the payments, paying the tax bills and so on. If convenience is important, look for that local lender or local connection.

* Check the underwriting criteria to make sure they comply with industry standards. The lender evaluates your ability to afford the mortgage against a couple of formulas. The current standard is that housing costs should amount to no more than 36 percent of your gross monthly income; housing costs and other long-term debt should account for no more than 41 percent of gross monthly income.

Lenders who want to sell loans immediately may seek a lower percentage to make the loan more attractive. Try to find out what the standard is and how closely the lender adheres to it.

Lenders can be delightful to work with, and there are plenty of good ones out there. Obviously you want to shop for the best rate and lowest number of points and fees. But to avoid some potential terrible headaches, go beyond the simple numbers when you evaluate a construction lender.

Mr. Johnson is a Baltimore construction manager. Ms. Menzie is a feature writer for The Sun.

If you have questions, tips or experiences to share about working on houses, write to us c/o HOME WORK, The Sun, 501 N.

Calvert St. Baltimore, 21278.

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