How to achieve your goals when cash is tight. Plus, four things you need to know about construction loans…
Whether you are trying to build your dream home, begin a project you’ve been waiting forever to tackle or have another goal that seems impossible because of … well, money, read on to discover the money saving method we used to save up $22,000 in 6 months to build our home!! Plus, we learn the ins and outs of the construction mortgage process.
Let me tell you a story. The day had finally arrived to pack up our boxes and move all of our things from our tiny basement apartment up to my hometown, 10 hours north. I was giddy with anticipation to finally be living near my family again. David was beyond thrilled to finally live near enough to our nine acre plot to be able to make it our home.
Our boxes were packed, David’s gracious family had spent the whole day helping us fit everything into our moving truck and cleaning our little place of any sign that we had been there at all. There was some sense of sentimentality in leaving our first apartment… the place where we started our lives together. There was definitely sadness about moving away from David’s family, who we would miss dearly. Mostly, though, we were Gung Ho!! On to our new adventure… until I got this one phone call.
“Amanda, this is Greg from the bank, do you have a few minutes to talk?”
“Sure, Greg! I’ve been looking forward to hearing back from you.”
“Well, we got the appraisal back on your build plans….”
Uh oh, he didn’t sound very excited.
“…because the comps in your area are lower, even if they aren’t as nice as the house you are building we have to stay within the range of those comps. Due to that, we can’t use your owned land as your down payment. If you want to move forward today with these plans we would need you to put $45,000.00 cash down.”
“We definitely do not have that much money.”
“Well, we just thought we would ask. Sometimes people have retirement savings they can tap into or people in their lives who could give them a gift.”
“A $45,000 gift? I don’t think we could make that happen either… What do we do now Greg? We are moving back to the area tomorrow.” (At this point, I was doing all I could to hold it together.)
“Well, contact your contractor and see if he can make any adjustments.”
So… that happened. With a heavy heart I told David and the exciting event of moving suddenly had a lot of joy sucked out of it. Sure, I was still happy to move near my family but what now? Will we just have to buy a trailer in order to live on our land? Should we just give up on our dream and do the normal thing and buy a house, instead? Do we have to start the LOOONG process of designing a whole different house all over again, that could take months, only to possibly run into this issue again with the bank?
We laid on our empty living room floor and tried to find a silver lining. We came up short… so we prayed.
Later we sent an email to our contractor that pretty much said: “Hey buddy, sorry for all your hard work but we probably have to give up.”
By the time we had moved he had gotten back to us with the suggestion to meet and discuss some options.
“If we shorten your large window by about 3 feet, change your cathedral ceilings to a flat one (but still 2 stories high) and you commit to doing the painting yourselves that will bring the $45,000 down payment to $28,000.” He said, over a piece of scrap paper he had scratched his clever money saving ideas on. While $28,000 was still something we didn’t have I could have hugged the man. He hadn’t slept well after receiving our news because he was trying to make this work for us. What a good guy!
I’m going to let you in on a little, somewhat embarrassing, secret. When we moved, we moved in with my parents. Yep, we are those people. People with crazy generous family willing to bless us with money savings and pleasant company at no cost to us at all –except the cost it takes to learn to live with your parents as an adult. But no, seriously, we are very grateful.
What would have been a 4-6 month stay at their home had potentially turned into much longer. David and I crunched the numbers and, with our budget spread sheet, figured out that we could probably save close to what we needed in about 6 months. My parents agreed to that 6 month extension immediately. Bless them.
Now, I know that what you can save is largely dependent upon how much you bring in, versus how much goes out each month… but we found by putting ourselves on a virtual “spending freeze” on unnecessary items, cutting down on luxury items, finding a cheaper cell phone plan and living rent free, we were able to save a lot more than we thought we could! We also hustled hard, picking up any available extra shifts and working overtime. In short, saving has been our sole focus.
We used a spread sheet we created to keep track of all we have coming in and going out of our accounts. It’s a lifesaver for me because it is set up to do all of the math for me! This makes knowing exactly how much we have and where our money is going super simple! We made sure to set high, practical goals for our savings every month… and if we had any left over that went into savings too!
So, here we are… as I write this post, 6 months later, we have saved $22,000! Combined with some other savings we set aside, and this year’s tax returns we are about to resubmit our plans to the bank and give this another go!
Not only have we been able to save, we have also been able to continue giving, being generous to others and have had a little “blow money” every month. I’m telling you, keeping track of very dollar using our spreadsheet totally worked for us! I hope you can find it useful no matter what dream or goal you are after!
I hope this story can light the fire in someone to pursue something that feels impossible! If anyone can learn from our mistakes, this will all have been totally worth it!
Along that vein… below are a few things I wish we would have known about construction loans earlier in the game…
4 Things You Should Know About Construction Loans If You are Building on a Budget:
1. Banks will almost never loan you the full amount of your build.
Most banks will require you to put somewhere between 5% to 20% down of the total value of your build according to their appraisal. The total value of your property is how much the bank thinks they could sell both your property and your built house for should you default on your loan. The appraiser will walk your property, review your builder’s plans and look at homes of similar size that have been sold in your area recently to determine how much they think your project is worth.
2. There are one time closing FHA Construction Loans out there.
These are not just for first time home buyers! As long as you meet the requirements, you could qualify for this loan that only requires a 3.5% minimum down payment. There are limits to how much your home can cost per state. You would also have to pay PMI insurance for a period of time, but the cost is usually rolled into your house payment monthly for a minimal payment.
3. You will have to pay for the appraisal.
This fee is usually included in closing costs… but if you decide to wait like we did, the bank will issue you a bill. I’m sure this fee varies by bank but for us is was exactly $300.
4. Just because you own your land, doesn’t mean you won’t need a down payment.
Written above is the total opposite of what our builder had assumed, my parents had told me and everything else I read had said. We thought because we owned our 9 acres without any loans (we paid for it in cash) that this was essentially cash in our hand which the bank would count as our down payment. This was not the case for us. Essentially, if our appraisal had come out to be more than it would cost to build our home then our owned property could have been counted towards our down payment. I can’t pretend to completely understand all of the reasons why it was not allowed to count but I will encourage you to not rely on your owned land as a down payment. This is what led us to be completely unprepared and hit the pause button for 6 months on our project.
We believe you can achieve your dreams and live a beautiful life… without breaking the budget.