In several previous updates, I discussed the pains of closing a construction loan in post-recession 2013. This post compares our closing experience to a couple of others to bring a bit of perspective.
Two parties close to me closed on properties in the past month. Both had strikingly similar experiences to ours. Both were presented with a last-minute ultimatum with unpleasant options such as more money down and walking away.
A Tale of Two Houses
In the first case, an all-too-common income issue led to a higher down payment requirement. This particular buyer’s side-business income didn’t qualify for the loan and this fact wasn’t uncovered until underwriting–very late in the closing process. Left with no other options, the buyer emptied out their pockets and produced the greatly increased down payment funds.
In the other case, a single-family rental property was being purchased by two business partners. The bank didn’t like the fact that one partner already had some properties in their name and required a higher down payment as a result. In the end, they opted to have the loan written under the other person’s name to avoid the substantial increase in down payment. In the end, the property is owned by both, but the loan only names one of them. It was a sub-optimal compromise, but it was vital to get the deal done.
The Long View
The housing market can be expected to rise in advance of the banking industry’s capacity and familiarity with the requirements. Having been practically dormant since 2008, it is slowly waking up to find a huge workload and a lot of new regulations to deal with. Our experience was not unique. While it should be considered an example of what you might expect, I do not intend it to be a warning away from construction financing. Many of the problems are endemic to the home finance industry as a whole. Whether you want to build or buy a house, be prepared for a few moments of suspense.
The most important lessons from these experiences:
- Patience and diligence are key when working through this process
- Budget for a down payment at least 15% larger than is required (you should have $58K to cover a $50K down payment)
- Drink wine