How to get a loan in this scenario?
October 26, 2015 6:46 AM Subscribe
We own a lot in a rapidly gentrifying neighborhood. Its value has tripled since we bought it; at this point we could sell it for $100k if we wanted to. We don't want to sell it. We want to build a 500 square foot house on it. We already paid for the permits, saved up the money, and now it's looking like we might fall $10k-$20k short on the total cost to build. Neither of us is employed. Given our extended explanation, how do we make this happen?
- We have $95k in savings (inheritance, personal loan, earned money) and we straight-up own the land.
- There is a garage on the lot, but due to zoning we may or may not be able to keep the garage. We expect it to cost ~$5k to either bring the garage up to code or to deconstruct and replace the garage.
- We work seasonal jobs. We have never had a problem getting work, but getting a job in this city is not an option. It wouldn't pay enough to make up the difference anyway. We earn our money through the sort of seasonal jobs where you get free housing, no commute, and work for 80 hours a week bussing tables and cleaning rooms in the middle of nowhere, teaching English, etc. We have liberal arts degrees and extremely spotty work timeline histories (that's something of a norm with seasonal work)
- We both have good credit. Last I checked, mine was hovering right around 800. I've since let my only credit card expire, so the number may be lower now. I'm not sure how scoring works, I'm just providing this for context.
- I am extremely good at managing money and have never been in debt, except for the one year when I was paying back the personal loan that I used to buy my half of the land we're building on.
- We would prefer to build now, since we already paid $10k for the building permit, which expires in 10 months and we would rather not pay for another permit. Additionally, the sooner we build, the sooner the county will reassess the value of our land and future house, and the lower our property taxes will be (remember: rapidly gentrifying neighborhood. We had no idea at the time)
- Not only will it cost us more to build later, that's also several years where we're not renting the house out or living in it.
- We were originally told by a contractor that was recommended to us by our architect that $60k was a reasonable budget. We were working with that number.
- It turns out this was not a reasonable budget. The numbers have kept growing for the past year. We're now looking at $90-100k to build. That's what contractors are telling us, and we're in the process of choosing a contractor who will pay to provide us with a detailed budget.
- Our cost of living is between $1000 and $1500 monthly while we're living here. We expect to be able to rent the house out for ~$1000/month after we build it while we go teach English to pay off the personal loan. Property taxes are currently ~$1000/year.
- We considered sending one of us off to do seasonal work, but we're not sure that would make up the difference either, and ideally we'd both like to be present while the house is being build.
I would like to know that there's some sort of buffer if we need one. Neither of us has parents or friends who can lend us money at this time. Based on this information, I feel like we should probably have $10k-$30k that we know we can count on if we should need it.
Since we have land worth $100k, $95k in cash, and the loan would provide use the buffer to build a $100k house (insurance companies think it will be worth $60k, market value will be more like $100k for the house itself), there has to be SOME way we can take out a loan through a bank or some sort of online crowdfunding service even though we don't have jobs. What are our options?
- We have $95k in savings (inheritance, personal loan, earned money) and we straight-up own the land.
- There is a garage on the lot, but due to zoning we may or may not be able to keep the garage. We expect it to cost ~$5k to either bring the garage up to code or to deconstruct and replace the garage.
- We work seasonal jobs. We have never had a problem getting work, but getting a job in this city is not an option. It wouldn't pay enough to make up the difference anyway. We earn our money through the sort of seasonal jobs where you get free housing, no commute, and work for 80 hours a week bussing tables and cleaning rooms in the middle of nowhere, teaching English, etc. We have liberal arts degrees and extremely spotty work timeline histories (that's something of a norm with seasonal work)
- We both have good credit. Last I checked, mine was hovering right around 800. I've since let my only credit card expire, so the number may be lower now. I'm not sure how scoring works, I'm just providing this for context.
- I am extremely good at managing money and have never been in debt, except for the one year when I was paying back the personal loan that I used to buy my half of the land we're building on.
- We would prefer to build now, since we already paid $10k for the building permit, which expires in 10 months and we would rather not pay for another permit. Additionally, the sooner we build, the sooner the county will reassess the value of our land and future house, and the lower our property taxes will be (remember: rapidly gentrifying neighborhood. We had no idea at the time)
- Not only will it cost us more to build later, that's also several years where we're not renting the house out or living in it.
- We were originally told by a contractor that was recommended to us by our architect that $60k was a reasonable budget. We were working with that number.
- It turns out this was not a reasonable budget. The numbers have kept growing for the past year. We're now looking at $90-100k to build. That's what contractors are telling us, and we're in the process of choosing a contractor who will pay to provide us with a detailed budget.
- Our cost of living is between $1000 and $1500 monthly while we're living here. We expect to be able to rent the house out for ~$1000/month after we build it while we go teach English to pay off the personal loan. Property taxes are currently ~$1000/year.
- We considered sending one of us off to do seasonal work, but we're not sure that would make up the difference either, and ideally we'd both like to be present while the house is being build.
I would like to know that there's some sort of buffer if we need one. Neither of us has parents or friends who can lend us money at this time. Based on this information, I feel like we should probably have $10k-$30k that we know we can count on if we should need it.
Since we have land worth $100k, $95k in cash, and the loan would provide use the buffer to build a $100k house (insurance companies think it will be worth $60k, market value will be more like $100k for the house itself), there has to be SOME way we can take out a loan through a bank or some sort of online crowdfunding service even though we don't have jobs. What are our options?
Yeah, have you tried getting a loan? You might run into some issues with the 500 sf, though. You know, once you have a bathroom and kitchen the framing, Sheetrock and concrete are not much more expensive. A bank doesn't want to own an asset that it can't sell. Could they sell your 500 sf house for 30,000? Maybe. I don't know that you could for the "value" of the land and the property which looks to be $200k once you are done.
But you won't know how the banks will react until you go and ask. Construction loan is what you want, I think. Be prepared to show tax returns and see if you can get a committment for the next season in writing.
posted by amanda at 7:30 AM on October 26, 2015
But you won't know how the banks will react until you go and ask. Construction loan is what you want, I think. Be prepared to show tax returns and see if you can get a committment for the next season in writing.
posted by amanda at 7:30 AM on October 26, 2015
Response by poster: We both have good credit. Last I checked, mine was hovering right around 800. I've since let my only credit card expire, so the number may be lower now. I'm not sure how scoring works, I'm just providing this for context.
I strongly suggest you use a website like CreditKarma.com to estimate your credit score. In general you do not want to let credit cards expire, as the number of accounts you have, the length of time you've had them, and the amount of credit available to you all positively affect your score.
You should also expect to pay more than the contractor estimates to build the house, even after you get the updated estimate. I want to say I've heard 10-20% as a rule of thumb.
posted by Anonymous at 9:25 AM on October 26, 2015
I strongly suggest you use a website like CreditKarma.com to estimate your credit score. In general you do not want to let credit cards expire, as the number of accounts you have, the length of time you've had them, and the amount of credit available to you all positively affect your score.
You should also expect to pay more than the contractor estimates to build the house, even after you get the updated estimate. I want to say I've heard 10-20% as a rule of thumb.
posted by Anonymous at 9:25 AM on October 26, 2015
Is it possible to leave portions of the house unfinished for the first year, so you can go off and earn enough money to pay for the final phase of construction?
posted by alms at 9:37 AM on October 26, 2015
posted by alms at 9:37 AM on October 26, 2015
Gentryfying neighborhood and 500 sq feet, you might get cheaper money for 1200 sq feet.
posted by Oyéah at 10:23 AM on October 26, 2015 [1 favorite]
posted by Oyéah at 10:23 AM on October 26, 2015 [1 favorite]
Two other options to consider:
Put the extra $20K on your credit cards.
Get a personal loan guaranteed by the value of the land, without reference to the construction of the new house.
This could be options if you aren't able to get a traditional construction loan.
posted by alms at 10:56 AM on October 26, 2015
This could be options if you aren't able to get a traditional construction loan.
posted by alms at 10:56 AM on October 26, 2015
Alternatively, you could hold on to the property till it hits a value you are comfortable with, sell it, and use that plus your savings to buy/build somewhere cheaper and non-gentrifying. Losing a 10k permit in that situation is not that important. Just make it up in your selling price.
I agree that getting a loan for a 500-sq-foot house is going to be a hard sell, in terms of resale value; I assume it's a 2-bed, one-bath? Or even one-bed? If you were to sell, who would buy something that small? You might be able to rent it, of course, but rental properties come with their own downsides. In a hot area you could definitely get 1k/month for 500 square feet, but you're going to attract younger singles/couples who are less stable, possibly tend to party more, are less likely to be long-term tenants.
posted by emjaybee at 1:09 PM on October 26, 2015
I agree that getting a loan for a 500-sq-foot house is going to be a hard sell, in terms of resale value; I assume it's a 2-bed, one-bath? Or even one-bed? If you were to sell, who would buy something that small? You might be able to rent it, of course, but rental properties come with their own downsides. In a hot area you could definitely get 1k/month for 500 square feet, but you're going to attract younger singles/couples who are less stable, possibly tend to party more, are less likely to be long-term tenants.
posted by emjaybee at 1:09 PM on October 26, 2015
Has your seasonal income been taxed? Often, if you can't give pay stubs, they'll accept income like that if they see a regular history in taxes.
Unsolicited advice: you're probably limiting your resale and rental market with that 500sf. Surely the benefit-to-cost ratio would be much higher for even a 850 sf two bedroom (or whatever the low end of average is in your neighborhood). Of course, it really depends on the market and who is attracted to your neighborhood.
posted by salvia at 4:52 PM on October 26, 2015
Unsolicited advice: you're probably limiting your resale and rental market with that 500sf. Surely the benefit-to-cost ratio would be much higher for even a 850 sf two bedroom (or whatever the low end of average is in your neighborhood). Of course, it really depends on the market and who is attracted to your neighborhood.
posted by salvia at 4:52 PM on October 26, 2015
I am A banker, I am not your banker.
The only major hang-up that I see is your income. I work for a big bank so I mostly deal with "QM" loans or "qualified mortgage" loans that have some specific and universal requirements. It's the result of legislation that came out of the financial crisis. There are provisions for people with seasonal income. The key to it is to be able to document it (usually with W-2s from the past two years and your most recent paystub), you'll need to be able to provide a written explanation for the gaps in your employment, don't overthink it, a couple of sentences will do. Depending on the situation, you may need to be able to provide some kind of documentation that shows your usual employer's intent to hire you when your services are in-season again.
The next hurdle is your debt-to-income ratio or DTI. QM rules call for a DTI of 43%. That includes the monthly payment of all the debt reporting on your credit report, taxes and insurance (HOA fees if applicable) and depending on how you finance it, your rent or mortgage that you're paying now or the mortgage that you will be paying once the house is built. Divide that by your average monthly income to get your DTI.
The thing about QM is that it only applies to loans (not lines) that banks want to bundle into mortgage backed securities. So a lot of smaller banker that don't care about selling loans on the market like that don't care about QM rules so they might have higher caps on DTI and might not care too much about the documentation (they will still care about DTI and the stability of your income) and there might line of credit products at a bunch of banks that wil work for you in the short term.
Typically, people in your situation get whats called a "bridge loan" or "construction loan" where you get a line of credit that you use to fund the building of the house with the understanding that it will get paid off when the house is done with a traditional mortgage. The bridge loan uses the bare land as the collateral and then the traditional mortgage can than be based on the value of the land and the now-completed house combined. Lots of large banks offer products like that.
posted by VTX at 6:43 PM on October 26, 2015
The only major hang-up that I see is your income. I work for a big bank so I mostly deal with "QM" loans or "qualified mortgage" loans that have some specific and universal requirements. It's the result of legislation that came out of the financial crisis. There are provisions for people with seasonal income. The key to it is to be able to document it (usually with W-2s from the past two years and your most recent paystub), you'll need to be able to provide a written explanation for the gaps in your employment, don't overthink it, a couple of sentences will do. Depending on the situation, you may need to be able to provide some kind of documentation that shows your usual employer's intent to hire you when your services are in-season again.
The next hurdle is your debt-to-income ratio or DTI. QM rules call for a DTI of 43%. That includes the monthly payment of all the debt reporting on your credit report, taxes and insurance (HOA fees if applicable) and depending on how you finance it, your rent or mortgage that you're paying now or the mortgage that you will be paying once the house is built. Divide that by your average monthly income to get your DTI.
The thing about QM is that it only applies to loans (not lines) that banks want to bundle into mortgage backed securities. So a lot of smaller banker that don't care about selling loans on the market like that don't care about QM rules so they might have higher caps on DTI and might not care too much about the documentation (they will still care about DTI and the stability of your income) and there might line of credit products at a bunch of banks that wil work for you in the short term.
Typically, people in your situation get whats called a "bridge loan" or "construction loan" where you get a line of credit that you use to fund the building of the house with the understanding that it will get paid off when the house is done with a traditional mortgage. The bridge loan uses the bare land as the collateral and then the traditional mortgage can than be based on the value of the land and the now-completed house combined. Lots of large banks offer products like that.
posted by VTX at 6:43 PM on October 26, 2015
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posted by matildaben at 6:58 AM on October 26, 2015 [2 favorites]