After choosing our builder in April, our next task was to secure funding. I had previously contacted some banks to learn about the construction loan process. You have to provide your blueprints for an appraisal so they can determine the market value of your future house. This determines the amount they are willing to loan you. This doesn’t take the actual construction cost into account at all. With this type of loan they send out inspectors who verify the work has been done and approve the next draw. During construction the loan is interest-only then it switches to a standard loan. Usually this carries a slightly increased interest rate than their standard package because of the added risk of a new construction.
We started the process with two banks of identical rates. My original thought was to pay for two appraisals in order to double our chances of obtaining a favorable appraisal. However, I got spooked by one bank because they had a several thousand dollar fee if you requested a rate lock and didn’t go through with the loan. I caught the fine print in time, but the fact that the bank didn’t verbally disclose it to me before I signed the rate lock agreement soured my opinion of them. Ultimately starting the process with two banks cost me money anyway: the second bank received a lower credit score report because of the first bank’s credit report (dings your score by ~20 points) so we had to come up with extra cash at closing. Sucks.
But that was just a minor frustration compared to the rest of the loan process. It ended up taking about four months instead of their usual two months. Of course it was the appraisal that caused all the trouble.
We were assigned an appraiser in early May. I spoke with him and answered questions about the design. But a week later I heard from the bank that a second appraiser was assigned. This was the first hint that there were going to be problems. I asked the first appraiser what had happened. He told me that he found it hard to find “comparables” for the home and passed on the assignment. Comparables, recently sold homes that are of similar size and quality, are the foundation of an appraisal. Uh oh. So we started with the second appraiser. I answered his questions and he declined to speak with my builder. After a couple weeks we received the appraisal.
It sucked. Basically it evaluated the home at less than 50% of our construction + land costs. Completely unworkable. Worst case scenario. I started working with the bank immediately on our options. They told me that I could write an appeal stating why I thought the appraisal was inaccurate and provide my own comparables. I got to work and wrote up a lengthy list of the appraisal’s faults. I noted that he didn’t take into account any of the green energy design even though there are methods to compensate for it. He hadn’t met with the builder and had declined to speak with him. He compared our massive wrap around porch to porches 10% of the size with no adjustment in value. This beautiful custom home was being compared to stock development houses. I actually contacted the first appraiser (the one who had passed on the job) and asked him to review my appeal. He approved of my report and seemed apologetic for the mess we had gotten into. Fortunately for us, the bank agreed that the appraisal was bogus.
But then, oddly, the bank asked the same appraiser to re-appraise the home. He provided a new appraisal that was higher but not drastically so. It was still a pathetic amount. This time the bank readily agreed that the appraisal had problems and needed to be thrown out.
So, we weren’t totally screwed but time was getting away from us and we hadn’t made progress with the application. The bank assured us that they would find an appropriate appraiser. Two weeks went by and they told me they had contacted 7 appraisers, none of which were willing to pick up the assignment. They were too busy or felt there weren’t enough comparables to write the report (like the first guy). Finally they found someone. This person spoke with our builder and took the green energy design into account. We waited impatiently for the new report.
Success! The appraisal was much closer to our goal! There was still a gap between the loan and our builder’s budget but it was within our means. Location is such an vital determinant. If we had a small parcel of land near Boston and built this house, it could get appraised for well over our construction budget. But in a rural area with more modest homes the loan could only go so far.
With the new appraisal in hand the closing went absurdly fast. They needed some last minute documentation but they were determined to close before their rate deadlines passed. This meant that 12 days after our appraisal came back, we closed. Having gone through 70 days of dancing around appraisals it was lightning speed!
Soon we will be starting construction on the house. Each step has been complicated but worthwhile. This project is awesome and daunting.