Planning ahead- future land/construction mortgage?

[Anonymous]

My husband and I have a plan that in the next 5 years or so, we want to buy some acreage in the country and build our own house. (We'll be doing some of the construction ourselves; his family includes almost every trade except masonry/concrete.)  We want to keep the house we're currently in as a rental.

We should be completely out of debt except for the current mortgage by then.  My current score is 709, and that's with over 55% CC utilization, 19k in CC debt, 7k in student loans, and a 50k HELOC.  All of that debt will be gone before we move.  (The CC debt should be gone in a year or so.)  He has a shorter history than me, but no negs otherwise.  We're planning to add him onto my oldest CC as joint to help that.  We refinanced the HELOC to a lower rate (yay for local banks!), and added him on to that as well.

What do we need to focus on to make this plan happen?  Will the bank look at the then-rental property as included in our debt-to-income ratio?  Any pitfalls to look for in buying land w/o an existing house, or in getting financing without a professional GC company building it?

Thanks!

[ShanetheMortgageMan]

A lot of construction lenders won't let you do "owner builder", where you do most of the work and just a site supervisor is hired, no GC... IndyMac is one construction lender that will still permit that though.

When it comes to your existing mortgage, an appraisal with a rent survey will be needed, whatever the market rent is determined, 75% of that will be used as rental income to offset that mortgage payment.

Prepare to put anywhere from 5-10% down on the project costs, if you own the land for longer than 12 months, then any equity in the land can be used as part of that down payment... if you've owned the land for less than 12 months then only the purchase price minus any mortgages against it can be used for the down payment.

You are going to need a qualifying debt to income ratio, as well as reserves in the bank after your down payment is put down.  Each construction lender has unique guidelines & procedures, and they very well could change down the road.. so it'd be wise to seek out your construction lender first to get yourself in shape for their construction loan program.

Most construction loan programs are construction-to-perm (CTP), which mean they roll over into permanent financing once the construction is complete... that saves in terms of not having to pay twice for closing costs.  The negative about that though is the permanent financing terms are often higher than what you could get if you just refinanced it into a normal permanent financing mortgage.

[Anonymous]

Thank you!

So it might be a good idea to look for land a year or so before the planned start of construction, to build up equity?  Could we use the HELOC on the existing house for a hefty down payment (30-50%) on the land?

The reserves are to cover the construction and land mortgage for 6+ months, correct?

[ShanetheMortgageMan]

Yes it wouldn't hurt to look for land sooner and hold onto it for 12 months.. however depending on where you are buying, land values might not be increasing.  You could use the HELOC on the existing home to finance items, but the resulting payment on the HELOC would be included in your debt ratio.  Reserves are to show the lender you have money leftover after down payment, closing costs, etc.  It is seperate from an "interest reserve", which can be bulit into the financed loan amount for construction... so you wouldn't have to shell out 2 housing payments each month.