Building a New Home or Renovating your Current Home – Common Questions
From the Show: Heritage Federal Credit Union
Summary:
Air Date: 3/30/23
Duration: 10 Minutes
Robyn Tucker answers common questions you might have when building a new home or renovation your current one.
Transcription:
Prakash Chandran: Building or renovating a home, although an exciting endeavor, can leave newcomers feeling lost in a sea of information and financial decisions. However, by asking the right questions ahead of time, you can map out a plan to fund your perfect home. We're going to talk about it today with Robyn Tucker. She's a mortgage loan officer at Heritage Federal Credit Union.
Host: This is Talking Sense with Heritage. I'm your host, Prakash Chandran. Robyn, thank you so much for joining us today. I really appreciate your time. Now, I know that there's two things that we're going to talk about building a new home and renovating a home. But let's start with a new build. Let's say someone has decided they want to build a new home, where do they begin?
Robyn Tucker: Thank you for having me. We start at the beginning. It's very important to have a really good fact-finding meeting. To get started, I need to know if you've found ground, if you've already purchased the ground; how many acres, if there's acreage involved; that all goes into the construction loan. Because if you already own the land, you've already got equity to put down as a down payment towards the construction. We also have the option that if you need to purchase the land and start the construction at the same time, we can do it that way and have it all one transaction and one loan to purchase the land and start the construction loan. I also need to know where you are on finding a builder, if you've talked to a builder, if you have estimates, if you have blueprints drawn up. We go through all of that in our first fact-finding meeting, and then kind of start the ball rolling from there of where the member is on the process, if they're halfway finished, if they've already got the property, or if we need to start from the very beginning and purchase the property.
Host: Okay. That makes a lot of sense. And a lot of things that you covered there weren't even things that I was thinking about. So in order to, for example, have that first productive fact-finding meeting, is there anything that you recommend that people bring ahead of time to this meeting with you?
Guest: That's a great question. And again, it just kind of depends on where the member is in the process. If you've already talked to a builder and you have your estimates and you have your blueprints, that's great, bring those with you because that's where we will start to structure the loan. That's how I'm going to know, you know, if you're building a home for $300,000 and you purchased five acres for $50,000, I know how to start structuring my loan. And then that way, I'm going to be able to give the member, that ever ending, you know, huge question of "How much is my monthly payment?" I'm going to be able to structure that loan so I know what their monthly budget is going to look like.
Host: Yeah. And you're touching on this, and I think the question always is, "How much house can I afford?" Right? Like, that's what people are always trying to look for. Do you have any best practices around how people can think about that?
Guest: To me, the financial broad brush does not fit every pocketbook because everyone's situation is different. Everyone is at different stages of their life. So when I start talking about a budget, I ask my member what makes you feel comfortable, that if you say, "Robyn, if you tell me my house payment is this much money, it's going to keep me up at night." And that's the last thing that I want to do. Whether someone's building a house or buying a house or refinancing a house, I don't want to make them feel like they're married to their mortgage. So, I have a very real honest conversation about their budget.
Host: So speaking of budget, having built a home myself, one thing that I was told and actually verified myself, is that things tend to take longer than you anticipate, and they tend to go over budget or at least go over what you've anticipated. So, how do you think about budgeting and what happens if someone's loan doesn't cover what their project budget is?
Guest: Another great question because that's a very real honest conversation that you have to have with your builder. Because if you go over, it comes out of your money, you have to pay for it. That's something that you do have to be mindful of as when you are picking out fixtures and picking out appliances and countertops and flooring, you have to pay attention to what you're spending because the builder's going to just say okay and put it in your house. So at the end of the day, if you run out of your loan, you've got to complete your house one way or another.
Host: Absolutely. And there's also kind of a time component, isn't there? So for example, if I pull a construction loan to build my dream home, there's obviously interest payments that I have to make. And if the project goes way over time, that's more money that I have to allocate to pay for that interest. So, is that something that you also advise people to think about?
Guest: So, the way that the credit union looks at it, we have to start somewhere. So, the initial timing that we give for a construction loan is nine months. Obviously, there are things that we cannot control, weather being one. I know when we personally build our home, they dug the basement and then it rained for the next three weeks. So, there's nothing that you can do about the weather. And again, timing as far as, you know, if the countertops you absolutely love are on six months back order, there's nothing we can do about that. So, what we do is that we start off with a nine-month timeframe. If we go over that, we have to extend it. There's no other choice because, again, we have to have a completed home at the end of the day. So during the construction, it is an interest-only payment. But you don't have to just make the interest-only payment, you can pay additional down towards principal if you choose to.
Host: Got it. Totally makes sense. Now, one of the things that you touched on earlier was that if the land is already owned, they can potentially use that equity in the land towards the construction loan down payment. Can you go into a little bit more detail there?
Guest: So, for example, if you have mom and dad, if you're lucky enough to have mom and dad own 20 acres and they want to give you five acres of it for free or a dollar, I think in the state of Indiana, they make you pay something for it, that is awesome. But what we will do, what that allows us to do is say you've got that five acres, and each acre is an appraised value of $10,000 per acre, that's $50,000 that you already have equity to go towards the construction loan. Because at the end of the day, we are going to take what you own in the land plus what you plan to build on top of it and structure it backwards from that. So in that example, you have $50,000 in the land. Your builder's going to build you a $300,000 home. At the end of the day, that appraised value should be $350,000, but you're only going to take a loan out for $300,000. So, that 50,000 is already equity in the property that you are going to build at the end of the day.
Host: Okay. That makes sense. Let's talk about home renovation. You know, this whole time we've been talking about building a new home, what about remodeling one, where do I start?
Guest: Again, we're back at the fact-finding process. We talk about what you already own because what the renovation loan is going to consider is your home as it sits. So, have you talked to the builder that you want to come in and gut your kitchen and take down that wall and redo that master bathroom and you put a hundred thousand dollars in it? So if your existing house as is is a $100,000 market value, plus your contractor says it's going to take a hundred thousand dollars to do those renovations that you want, so at the end of the day, you should have a $200,000 home. The uniqueness of the renovation loan is that say, yes, you've got a $100,000-home as it sits, but you only owe $75,000. So, you've got $25,000 in equity. So again, that equity is going to be able to be used for the down payment for the new loan, the renovation loan. So if you have a $200,000 value, you're only going to have to borrow $175,000 to refinance the mortgage plus give you enough money to make the changes that the builder is going to renovate your home.
Host: Okay. Understood. Now, you know, in a new home construction, there is a construction loan that you pull with Heritage. Can you talk about the different types of loans that there are specifically for renovating a home and how do people navigate which one is best for them?
Guest: So, it goes back down to your budget, what makes the most sense. And in some cases, equity and who's going to be doing the renovations. If you call me and say, "Hey Robyn, I've got $50,000 of equity in my house. I just want to get that cash to do home improvements by myself," that's great. I'm going to look into what's called a cash out refinance to use the equity of your existing house, refinance your first mortgage, and give you the cash to do those renovations. Great. Or if you call me and say, "Hey, Robyn, I want to borrow $50,000 that I don't have equity in my house, but I want to make these renovations myself," I'm going to say I can't do that because I have to have a builder, a licensed contractor do the work. I cannot have my members do what's considered like a self-build towards the construction loan or a renovation loan. It has to be a licensed contractor. That's how we control the funds to make sure that the work is being completed the way that the loan was submitted, because we have to have the blueprints, the estimates, everything that the builder is going to do to the house, that's how the appraisal is completed. So, that's how we control the funds to make sure that the funds are being used to build the house according to the plans.
Host: Okay. And finally, you know, people have a lot of options when it comes to loans these days. Could you share with the audience why they should choose Heritage to help build or renovate?
Guest: Our process, our products and customer service are just simply the best. All the draws for your contractor are local. When they submit a draw, which is something they really like, they can get their check the same day. Because ultimately, your contractor is being reimbursed for the work that he has done.
Our underwriting is local, so we get answers most of the time the same day. We have a mortgage servicing department that handles, again, the draws to the contractor. So, it's a very easy process for them and for our members because ultimately it is their money so they sign off on whether or not they're going to release the funds to the contractor. Our construction loans are a one time close. So, that means we lock your rate in, you have one set of closing fees and you know what that payment's going to look like for the next 20 or 30 years.
Host: Well, Robyn, I really appreciate all this information here today. Just before we close, is there anything else that you'd like to share with our audience?
Guest: I don't know. I don't think so. I really enjoy working with members and going through the construction loan process. It's one of my favorite things to do, so I am more than happy to help and answer any questions that anyone may have.
Host: Robyn, thank you so much again for your time.
Guest: Thank you for your time.
Prakash Chandran: That was Robyn Tucker, a mortgage loan officer at Heritage Federal Credit Union. For more information, you can visit heritagefederal.org/homeloans. If you found this episode to be helpful, please share it on your social channels and be sure to check out the entire podcast library for topics of interest to you. Thanks again for listening to Talking Sense With Heritage. I'm Prakash Chandran. Be well.
Prakash Chandran: Building or renovating a home, although an exciting endeavor, can leave newcomers feeling lost in a sea of information and financial decisions. However, by asking the right questions ahead of time, you can map out a plan to fund your perfect home. We're going to talk about it today with Robyn Tucker. She's a mortgage loan officer at Heritage Federal Credit Union.
Host: This is Talking Sense with Heritage. I'm your host, Prakash Chandran. Robyn, thank you so much for joining us today. I really appreciate your time. Now, I know that there's two things that we're going to talk about building a new home and renovating a home. But let's start with a new build. Let's say someone has decided they want to build a new home, where do they begin?
Robyn Tucker: Thank you for having me. We start at the beginning. It's very important to have a really good fact-finding meeting. To get started, I need to know if you've found ground, if you've already purchased the ground; how many acres, if there's acreage involved; that all goes into the construction loan. Because if you already own the land, you've already got equity to put down as a down payment towards the construction. We also have the option that if you need to purchase the land and start the construction at the same time, we can do it that way and have it all one transaction and one loan to purchase the land and start the construction loan. I also need to know where you are on finding a builder, if you've talked to a builder, if you have estimates, if you have blueprints drawn up. We go through all of that in our first fact-finding meeting, and then kind of start the ball rolling from there of where the member is on the process, if they're halfway finished, if they've already got the property, or if we need to start from the very beginning and purchase the property.
Host: Okay. That makes a lot of sense. And a lot of things that you covered there weren't even things that I was thinking about. So in order to, for example, have that first productive fact-finding meeting, is there anything that you recommend that people bring ahead of time to this meeting with you?
Guest: That's a great question. And again, it just kind of depends on where the member is in the process. If you've already talked to a builder and you have your estimates and you have your blueprints, that's great, bring those with you because that's where we will start to structure the loan. That's how I'm going to know, you know, if you're building a home for $300,000 and you purchased five acres for $50,000, I know how to start structuring my loan. And then that way, I'm going to be able to give the member, that ever ending, you know, huge question of "How much is my monthly payment?" I'm going to be able to structure that loan so I know what their monthly budget is going to look like.
Host: Yeah. And you're touching on this, and I think the question always is, "How much house can I afford?" Right? Like, that's what people are always trying to look for. Do you have any best practices around how people can think about that?
Guest: To me, the financial broad brush does not fit every pocketbook because everyone's situation is different. Everyone is at different stages of their life. So when I start talking about a budget, I ask my member what makes you feel comfortable, that if you say, "Robyn, if you tell me my house payment is this much money, it's going to keep me up at night." And that's the last thing that I want to do. Whether someone's building a house or buying a house or refinancing a house, I don't want to make them feel like they're married to their mortgage. So, I have a very real honest conversation about their budget.
Host: So speaking of budget, having built a home myself, one thing that I was told and actually verified myself, is that things tend to take longer than you anticipate, and they tend to go over budget or at least go over what you've anticipated. So, how do you think about budgeting and what happens if someone's loan doesn't cover what their project budget is?
Guest: Another great question because that's a very real honest conversation that you have to have with your builder. Because if you go over, it comes out of your money, you have to pay for it. That's something that you do have to be mindful of as when you are picking out fixtures and picking out appliances and countertops and flooring, you have to pay attention to what you're spending because the builder's going to just say okay and put it in your house. So at the end of the day, if you run out of your loan, you've got to complete your house one way or another.
Host: Absolutely. And there's also kind of a time component, isn't there? So for example, if I pull a construction loan to build my dream home, there's obviously interest payments that I have to make. And if the project goes way over time, that's more money that I have to allocate to pay for that interest. So, is that something that you also advise people to think about?
Guest: So, the way that the credit union looks at it, we have to start somewhere. So, the initial timing that we give for a construction loan is nine months. Obviously, there are things that we cannot control, weather being one. I know when we personally build our home, they dug the basement and then it rained for the next three weeks. So, there's nothing that you can do about the weather. And again, timing as far as, you know, if the countertops you absolutely love are on six months back order, there's nothing we can do about that. So, what we do is that we start off with a nine-month timeframe. If we go over that, we have to extend it. There's no other choice because, again, we have to have a completed home at the end of the day. So during the construction, it is an interest-only payment. But you don't have to just make the interest-only payment, you can pay additional down towards principal if you choose to.
Host: Got it. Totally makes sense. Now, one of the things that you touched on earlier was that if the land is already owned, they can potentially use that equity in the land towards the construction loan down payment. Can you go into a little bit more detail there?
Guest: So, for example, if you have mom and dad, if you're lucky enough to have mom and dad own 20 acres and they want to give you five acres of it for free or a dollar, I think in the state of Indiana, they make you pay something for it, that is awesome. But what we will do, what that allows us to do is say you've got that five acres, and each acre is an appraised value of $10,000 per acre, that's $50,000 that you already have equity to go towards the construction loan. Because at the end of the day, we are going to take what you own in the land plus what you plan to build on top of it and structure it backwards from that. So in that example, you have $50,000 in the land. Your builder's going to build you a $300,000 home. At the end of the day, that appraised value should be $350,000, but you're only going to take a loan out for $300,000. So, that 50,000 is already equity in the property that you are going to build at the end of the day.
Host: Okay. That makes sense. Let's talk about home renovation. You know, this whole time we've been talking about building a new home, what about remodeling one, where do I start?
Guest: Again, we're back at the fact-finding process. We talk about what you already own because what the renovation loan is going to consider is your home as it sits. So, have you talked to the builder that you want to come in and gut your kitchen and take down that wall and redo that master bathroom and you put a hundred thousand dollars in it? So if your existing house as is is a $100,000 market value, plus your contractor says it's going to take a hundred thousand dollars to do those renovations that you want, so at the end of the day, you should have a $200,000 home. The uniqueness of the renovation loan is that say, yes, you've got a $100,000-home as it sits, but you only owe $75,000. So, you've got $25,000 in equity. So again, that equity is going to be able to be used for the down payment for the new loan, the renovation loan. So if you have a $200,000 value, you're only going to have to borrow $175,000 to refinance the mortgage plus give you enough money to make the changes that the builder is going to renovate your home.
Host: Okay. Understood. Now, you know, in a new home construction, there is a construction loan that you pull with Heritage. Can you talk about the different types of loans that there are specifically for renovating a home and how do people navigate which one is best for them?
Guest: So, it goes back down to your budget, what makes the most sense. And in some cases, equity and who's going to be doing the renovations. If you call me and say, "Hey Robyn, I've got $50,000 of equity in my house. I just want to get that cash to do home improvements by myself," that's great. I'm going to look into what's called a cash out refinance to use the equity of your existing house, refinance your first mortgage, and give you the cash to do those renovations. Great. Or if you call me and say, "Hey, Robyn, I want to borrow $50,000 that I don't have equity in my house, but I want to make these renovations myself," I'm going to say I can't do that because I have to have a builder, a licensed contractor do the work. I cannot have my members do what's considered like a self-build towards the construction loan or a renovation loan. It has to be a licensed contractor. That's how we control the funds to make sure that the work is being completed the way that the loan was submitted, because we have to have the blueprints, the estimates, everything that the builder is going to do to the house, that's how the appraisal is completed. So, that's how we control the funds to make sure that the funds are being used to build the house according to the plans.
Host: Okay. And finally, you know, people have a lot of options when it comes to loans these days. Could you share with the audience why they should choose Heritage to help build or renovate?
Guest: Our process, our products and customer service are just simply the best. All the draws for your contractor are local. When they submit a draw, which is something they really like, they can get their check the same day. Because ultimately, your contractor is being reimbursed for the work that he has done.
Our underwriting is local, so we get answers most of the time the same day. We have a mortgage servicing department that handles, again, the draws to the contractor. So, it's a very easy process for them and for our members because ultimately it is their money so they sign off on whether or not they're going to release the funds to the contractor. Our construction loans are a one time close. So, that means we lock your rate in, you have one set of closing fees and you know what that payment's going to look like for the next 20 or 30 years.
Host: Well, Robyn, I really appreciate all this information here today. Just before we close, is there anything else that you'd like to share with our audience?
Guest: I don't know. I don't think so. I really enjoy working with members and going through the construction loan process. It's one of my favorite things to do, so I am more than happy to help and answer any questions that anyone may have.
Host: Robyn, thank you so much again for your time.
Guest: Thank you for your time.
Prakash Chandran: That was Robyn Tucker, a mortgage loan officer at Heritage Federal Credit Union. For more information, you can visit heritagefederal.org/homeloans. If you found this episode to be helpful, please share it on your social channels and be sure to check out the entire podcast library for topics of interest to you. Thanks again for listening to Talking Sense With Heritage. I'm Prakash Chandran. Be well.