We’re interested in building a new home in the southern suburbs of Kansas City. My question is whether it is possible to convert a construction loan into a mortgage, prior to completing some of the interior detail on the house.
I may be dreaming, but here’s what I’d like to do. Hire a GC/Builder to build the home, with the exterior complete, then leave some of the interior details for me to complete. I am a serious woodworker (not a job, just a hobby) and have much experience with cabinet making, stair cases, interior trim, built-ins, etc. Would it be acceptable to any lender to have the builder complete all of the exterior, and most of the interior (sheet rock, HVAC, electrical rough in (just cheap, temporary fixtures) rough plumbing, etc), then close on the mortgage? After closing, I’d like to be able to take my time (say 1 to 2 years total) to complete all of the interior details such as final painting, cabinet and vanity construction and installation, flooring installation, interior trim, fancier lighting fixtures, staircase.
If it matters for answering this question, we have about $125K equity in our current home which we’ll sell to build this new home. The new home (with lot) will end up being worth say $350K total.
Replies
My experience with morgage companies is that they want a finished product before issuing a morgage loan. If you default on a 250K loan (350K-125K equity), they may not be able to resell the property for the balance of the note. Now if you were asking for a morgage of less than the amount of the equity you have in the home, you may stand a better chance.
Dave
Yes.
If you get a COH (Certificate of Occupancy) or whatever Kansas calls it; you should be able to have a conventional mortgage company take over. The nomenclature is you want a "take out" mortgage to take out the construction loan.
Most inpsectors will not give you a COH unless all electrical appliances and plumbing appliances are in, e.g., no stub outs. Cabinets can be out, walls unpainted, but taped, mudded and primed is OK, etc. Ask your inspector.
Regards,
Boris
"Sir, I may be drunk, but you're crazy, and I'll be sober tomorrow" -- WC Fields, "Its a Gift" 1934
You might be better off talking to your lender than asking here. This sort of thing seems to vary from region to region.
I did something similar to what you did. The lender specified what had to be done before they approved the conversion. And we had to have more than the typical 20% upfront.
I used to be Snow White, but then I drifted. [Mae West]
Boris' reply is closest to my experiences.
With your initial construction loan, insure that it can be converted to a conventional-type loan upon issuance of the CO. One closing, with some slight paper shuffling after the CO is issued.
As to what needs to be completed before the CO is issued, much of what is required is up to the discretion of the building inspector.
Example: One neighbor had their house built by a builder. The inspector required them to have the house 100% complete before he issued the CO. Part of the reasoon was that the homeowners were twits and 1) he wantd to bust their chops and 2) he didn't want any legal problems arising from him issuing a CO before the house was 100% and the builder taking too much time to complete the inevitable punch list. It all related to the homeowners being tough to work with and lawsuit-happy.
A second neighbor GC'd his house. He didn't do the best job of it, his plans were similar to yours. Get the shell up and he'd complete the decorating work. The inspector, while more lenient than the first example, made sure he had quite a bit done before issuing the CO. I thnk there were over 12 CO inspections before he finally issued the paper.
Last case, my own house. The only things I didn't do on my own when building my house was the foundation, the chimneys/fireplaces, installing the oil burner/tank/water heater, and the drywall. I did every thing else. To get my CO he wanted primed drywall, no open electrical junction boxes, a sanitary floor in the kitchen, a working kitchen sink, a sanitary kitchen countertop, and one working bathroom with a sanitary floor. Stairs needed railings, etc. He was pretty daarn lenient with me.
With your construction loan, realie that the clauses are negotiable. You can change the number of inspections/draws, etc. If you;re approachign yoour 12 month limit, contact the bank and they'll give you an extension. They dont want you to fail.
Got to have your ducks in a row to get the process rolling, though.
I did pretty much the same thing as you want to after moving to Texas from England. I had an 80% construction loan with Indymac Bank from California which they rolled into a permanent mortgage with a bunch load of work incomplete. I didn't use a GC, I employed sub-contractors and received the draws directly. In fact most of it is still waiting to be done, as my wife constantly reminds me.......If you want contact more details, e-mail me at nc@texas,net and I will be glad to provide these as they treated me so well.
Good luck!
The vast majority of home loans are issued by banks that trade them in the aftermarket. They resell those mortgages to other financial entities. The standard is to have a finished, saleable house. Freddiemac has something to do with it. Having a reasonable standard ensures that an investor has real property of reasonable value standing behind the paper he holds.
But many small private local banks ( a dying breed due to consolidation and aquisitioning) hold their own paper and rarely sell in the mortgage after-market. They are your best bet for what you propose.
My loan is with a local that believes in investing in their own community.
The other issue of certificates of occupancy is one to adress with your local enforcement people.
Excellence is its own reward!