I found the loan officer at our bank to be very helpful. You might want to talk to yours at this point in the process.

Thanks. I have been talking to the loan officers at two local banks, so I have most info on the loans themselves, what I can qualify for, and what cash I have, but that is all dependent on the appraisal or everything changes. Nobody at the banks can seem to advise though on the general level of appraisals that have came out other than to say they've been lower than cost to build in general. We may very well just have to roll with things and see what the appraisal says. I would prefer to know that I'd have to tone the build down some now during planning stages, than to have to go back to the drawing board after a poor appraisal. If plans will appraise at say 90% of cost to build, I'm fine. If it's more like 70%, that becomes crazy as 80% of 70% is only 56% funded, or 44% down payment required + closing + contingency. That's what I'm trying to avoid, and if I knew it upfront would simply change plans now.

Our local bank suggested having the plans appraised prior to signing a contract with a builder. Appraisal came in at 96% of cost to build (we owned the land), but factoring in the cost of the land brought that down to 77%. Wasn't crazy about that, but we had the funds to move forward. Fortunately, the appraisal done for the mortgage company came in much higher. Still more than what our costs were, but they came in at almost 94%. If you have completed plans, you may want to spend the $200-$300 for an appraisal to see where you're at.

Our bank did the appraisal as soon as we had plans and a bid, and our loan officer has been very helpful in terms of how to finance our dream. Good luck!

My banker is requiring plans to be complete before building as they need to do the appraisal before construction starts. Makes sense.

The problem is that the builders I want to use require a down payment to move forward with the blueprints. So I either lose that down payment or I need extra cash that doesn't even go against LTV ratio.

My banker did mention that age plays into the equation with new construction but not so much with existing homes.

I've been diligent with ensuring I'm getting the best bang for the buck on sqft without sacrificing core specs. For example one home I found was $10K less but 300 sqft less. If I do the math the $33 per sqft is going to help me on the larger house at $10K more.

Good discussion, I don't think alot of folks think this through early enough in the process.

Afraid I can't offer any other advice. We bought land, found plans, found a builder and secured financing in that order. Of course, nothing is ever THAT simple and we have since changed builders and plans. Good luck!

We are working independent of a builder to get the plans drawn and paying out of pocket, so I'd like to not have to redo the whole process later due to a poor appraisal. We've talked with several builders, and have one we like, and he's given estimates based on other custom homes he's built. So I know how much roughly it will cost. I'm working on finishing the plans with a designer now. I know I can afford the mortgage on this plan at that cost, even if I'd have to finance 80-90% the payment is still less than the debt to income ratios required. Unknown and limiting factor could be the appraisal, which makes planning almost impossible. Even though I qualify, if the appraisal doesn't pan out, then the bank won't be able to make the loan required. I'd have to delay building for a while to up the required cash down due to the low appraisal. Then you get caught up in rising interest rates and you have to save even more as the total that can be loaned falls with rising rates...

I'm sure most probably would argue I'm overanalyzing, but I like to get ducks in a row before diving completing in without a life jacket. I guess I'm just thinking that it should be income levels and amount of mortgages people can qualify for in the area should be the force that sets the market, not an artificial barrier derived from an appraiser's evaluation. If a buyer and seller agree to a price, and the buyer would otherwise qualify to buy said house, is that not the true definition of free market? We now have an outside force that is limiting the buyer side of the equation. If it's buyers of an area not being able to qualify for loans, then fine, let that set the ceiling on prices, but real estate agents I've talked to here are reporting that sales are falling through not due to folks not qualifying, but rather due to low appraisals not allowing markets to rise. Then those poor appraisals set that round of prices and are subsequently used as the comps for the next round and again results in poor appraisals. Vicious cycle it is.

You're not over analyzing at all. I'm waiting for my lot to appraise then going to sit down with my lender to review the proposals to get a gut check on whether there will be an appraisal issue or not. In general my market usually doesn't have any issues (from what I hear).

There is a bit of a building boom going on right now so look out for additional rising costs from the builder as their suppliers are putting out price increases as we speak. Expect 2-3% next year over the quotes you're getting today.

Everyone keeps talking about the fed raising rates but at the end of the day you might see two or three 1/4 % increases by end of 2016. Historically the economy usually stays flat and you see very little happen with policy changes during an election year.

Our pre construction appraisal came in on contract price with no contingency. That means all overages (10% ish) had to be cash to maintain the LTV we financed with.

I'm confident if we re-appraised we'd be higher than cost based upon the neighbors builds but we are in a subdivision.

I put down 20% and needed 10% in cash. (Total build just north of 600k)

Our pre-construction appraisal came in around 78% of the cost to build including the lot. We were able to proceed, but we are hoping the appraisal for the permanent financing comes in a little higher. We are in the Midwest.

Mama,
Would you mind sharing which categories/items where in the overages? Have you heard of anyone putting a contingency on a contract? I'd think most builders would say go pound sand. I believe the rule is that the loan will be the lower between contract price and appraisal but you can't get a loan for higher than the contract price (even if the home appraises higher than the contract price).

Modred,
That would would give me a heart attack. Would you mind sharing why it may have come in that low? Is there any reason you would expect the appraisal to come in higher at permanent financing? My understanding is that they are usually lower unless there are market adjustments or you add improvements.

My first (pre-construction) appraisal came in at 90% of the cost to build, including the land. The second one came back at the exact same figure. I ended up adding/upgrading a few more things along the way and paid for those in cash, which I expected to have to do. But the end result was a house with slightly nicer "things" that still had the same dollar value in the appraisal.

whaas,

Our appraiser was behind and delivered the appraisal about 10 days after he had told the lender he would have it done. The comps were old (one over a year) and not good comps. Appraisers are backed up in this area, so to have it re-appraised at that point would have delayed construction another month. We had the funds to make it work, so proceeded. Our lender plans to use a different appraiser for the permanent financing.

Our banks appraisal just needed the blueprints to show square footage, number of and room use, and basic construction (slab, crawl, etc.), land acreage and location. If you have that much done on your current plans it should be enough for the bank to do an appraisal cause thats the items they use when they do compareables.

Mama,
Would you mind sharing which categories/items where in the overages?
Have you heard of anyone putting a contingency on a contract? I'd think
most builders would say go pound sand. I believe the rule is that the
loan will be the lower between contract price and appraisal but you
can't get a loan for higher than the contract price (even if the home
appraises higher than the contract price).

You are right. We could not actually get an appraisal higher than our contract price, but we were unable to get contingencies in the contract at all.

What you *can* do, and what we *should* have done is to buffer our contract within the allotments rather than try for an overall contingency. Where the builder had 10K for a sprinkler system I should have had him increase it to 15K. Cabinets allotment at 30K, increase to 40K. Maybe you'll get lucky and not spend to the upper amount you have in the contract and end up with some contingency that way.

By the way. Everything was over except the house because I did a fixed price contract. I *chose* to go over in flooring, stone, tile, cabinets, landscaping, electrical, lighting, plumbing, etc.

Ours appraised (with the 4 acres) almost 13% over cost to build. Granted, our contractor fee is incredibly low. Bank loans CTB or 90% of appraisal, whichever is least, so we received the latter.

It seems there's a type of informal appraisal that exists..... can't recall the exact terminology. Broker's estimate, maybe? Might look into that, though you're essentially paying for a second appraisal.

ascorsonelli,
When you say the bank loans 90% of appraisal are you saying you needed 10% down or the loan was 90% of the the appraisal and you still needed down payment on top of that?

If our CTB had been more than 90% of the appraised value, we would have had to make up the difference with cash or a second loan. No down payment was required for the construction loan (though all those "fees" add up quickly).

That clear it up? Not sure if I'm answering the question you're asking.

I think so just sounds like a product I'm not similar with.

If my home appraises at 100% of the CTB I can get a loan for that amount.

If the appraisal feel short of the CTB I'd have to come up with those funds out of pocket.

If the appraisal exceeded the CTB, my loan would still be based off the CTB.

Anyway I cut it I need 10% down of the total loan

Then again, we're not doing a combined construction to permanent loan. Might be why the difference? We'll have to pay for a second appraisal and closing fees. Womp womp....

construction to perm financing has it's downfalls. It's riskier for the bank, so the rate is higher than you will get on a refinance.

I'm doing a construction loan as a 7 year arm fixed rate (which is lower than current 30 year fixed). I'll have to watch the rates over those 7 years to ensure I lock into a 30 year fixed at the right time. I guess I run some risk if there is a down turn and the rates rise.

My lot loan is a 5 year arm fixed rate and that will roll into my construction loan.

I guess I'm feeling pretty fortunate right now. We did a separate construction loan and are just finishing up, as our own GC and doing most of the finish work ourselves. We borrowed every penny available in the construction loan and put in another 5% of our own money, but we still came in about 5% below the original pre-construction appraisal. Now we just got the final appraisal back, and it is a good 15% ABOVE what our pre-build appraisal was. Woohoo! So our permanent loan will actually be only 75% of the appraised value. I was actually impressed with the comps that they found, they are surprisingly comparable. Apparently the real estate market has taken a swing up here in the Midwest. Doing a little happy dance here and feeling lucky we are in a low cost of living area, about $83/sq foot for the finished spaces.

I'm in the south, but we just finished our build. We did separate construction and permanent loans. Couldn't find a one-time close locally. We self-contracted, but when we turned in our plans to the appraiser, we also submitted our individual bids for the whole job. There is a section in the appraisal where he factored some of those items in: hardwood floors, natural stone, etc. Maybe it just helped him select comps. Not sure. Anyway, excluding our property, the pre-construction appraisal came in at 95% of the cost to build. Final appraisal was only 3K more than the pre-construction so no noteworthy change there.

Just got our pre-construction appraisal yesterday at 4pm on a Friday with we have some bad news comment. $33k under cost to build. Great! Panic set in. We went through all the emotions. Really ticked off on how that process is done, but what can you do. Our 3 acre lot was gifted to me from my dad's farm. So tomorrow we sit down with the builder and see how we can lower our cost to build. So I will be giving some things up. Like possibly finishing the basement, the upstairs bonus room etc. I sure hope the final appraisal comes in higher so I can get those things done at that time. Stressful process. We should be breaking ground in a couple of weeks.

Sorry to hear that! Hopefully you're getting guidance on what I items aren't adding much value.

Would you mind sharing your $ per sqft and your general area?

Cutting costs also cuts value when you are cutting finished space. It's a circle. Simplifying the footprint to eliminate jogs and complex roofline can help to cut costs without giving up value.

how can a new construction that meets the current fire code ( such as sprinkler inside the home) compare with old construction that does not meet current building codes? How does an appraiser bring something to the middle between high priced and low priced when construction costs have gone up and homes have sold low for the past 8 years because appraisals have come low in all 50 states? Homes in Bangalore that used to cost $6,000 in 1991 are selling at $500,000 and homes in the US that used to sell for $100,000 in Houston, Tx in 1991 are selling for $120,000. Have the banks robbed the middle class in the US of their savings?

We are just going through this financing/appraisal process right now in the Chicago-area with our set of plans. We own a lot outright and just had appraisal come back (with a big bank) at about 88% of our cost-to-build and 78% of the total project cost (they calculated this as cost-to-build plus our value of land). We cannot make up the difference with cash and are scrambling to find another more lenient lender. Comps were difficult to find and the appraiser had some system that was supposed to account for a 15 year old home sale being used as a comp. The "formula" seems to be a secret, but they added money to that older home's value for it's age, smaller lot, etc. Money was taken away from it's sale price because it was bigger than ours, etc. Very confusing. There are several comparable homes for sale that are in the same rough price per square foot but these are not considered (or not as much) until they sell. This is a higher-end, custom, home but really not outrageous. The process has been frustrating and we may have to abandon building if a new appraisal does not come through.

Some lenders we have talked to include our land equity as part of our downpayment (so we have to bring less cash to close) but others do not.

Appraisals are required by federal law if financing is involved. While the purchaser or homeowner pays for the appraisal, it is owned by the lender. It is designed and required in order to protect the lender. People completely misunderstand the relationship. The appraiser works for the lender, not the builder or the borrower.

Rarely does a potential homeowner understand the appraisal process. Most realtors don't really understand it, either. There are lenders that don't understand it.

New construction is a very risky form of lending. Lenders see you and your project as a risk. The cost to custom build is always higher than the cost to production build. The lender is just trying to protect itself. The law requires it.

I sympathize with you. I have been on both sides of the issue. When I built my custom home, I brought more than 50% to the table. This reduced the lenders exposure and they were tripping over themselves to lend me money. If you are bring less money to the table, it becomes much more risky for the lender and they aren't as enthusiastic.

Ideally, new construction will be compared to new construction. It is almost impossible to find a similar comparable that is new custom construction. The comparable must have been an arms length transaction (in the MLS or widely advertised and available if there is no MLS in the area). This means the appraiser will try to select the newest, most similar homes available. They must also be in close proximity to the subject proposed home. If you are in a rural area, the distances expand along with the closing time. Once a "most similar" is selected, it's features are compared to the subject property. The differences will be assigned monetary values based on data and experience. A final determination of valuation is made after at least three properties go through this process. Additional comparable properties can be added to support the valuation or to include some element of the proposed property.

As a retired appraiser, all I can say is if you want to borrow money, you will have to go through a very confusing, frustrating and expensive process in order for someone to lend you money. If you didn't need someone to lend you money, you wouldn't need the financing. You could just pay cash. The more cash you bring to the process, the less the lender will require because you have reduced their risk.