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Info-to-Build-On
Bank Financing 101
by Patsy Hennin
Co-Founder Shelter Institute
June 5, 2003
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Summary:
For thirty years our students have mastered the art of getting bank financing for building, having their houses built, and renovating. The key to success is to recognize that this is a business proposition and the owner’s job is to have a professional plan to present to the bank. “Owner-Builders” have the reputation of sketchy plans, no real financial sense and the worst, their tendency to change their minds (remember change orders in the contractor’s world may often double the cost of the project). The solution is that the owner has a concrete plan, price quotes for all aspects of the project, and a realistic timeline for completion.
Preparation:
When an experienced General Contractor goes to the bank, the price quotes are based on per square foot costs including a markup on all materials and subcontractors' work. As a first time project, the dream should be backed with:
• Deed, or purchase and sale contract
• Complete plans
• Cardboard (or gingerbread) model for visual affect
• Timeline that is fairly specific
• List of specifications with cost estimates
• Two years of tax returns
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To the total bottom line add twenty-five percent for overruns and even then, your square foot price will be low. The bank wants to know that this is a serious action plan and any contractors labor costs should be figured in. This is a practice run for the owners to know that they have thought things through and a good source of help with timeline and costs are: Estimating Homebuilding Costs $17.00.
A good reference to play with finance is the website Bankrate.com. There you will be able to strategize to select a realistic interest rate and time over which you borrow. You can try on several different scenarios and print out an amortization schedule which will allow you to pick a loan realistically. They will also match you with a financial source but my recommendation is to find a local source that will match what you can find and a savings bank is often the best source because they may hold the mortgage over the course of the loan rather than sell in the secondary mortgage market.
Time Value:
Remember time is the factor which increases the amount you pay back. While interest is tax deductible it is also increased by the time over which you borrow. The best strategy is to select a loan time which gives a comfortable monthly payment and pay down the principal any time you have extra cash. This means you still make each monthly payment but specify any extra payment towards principal. The net affect is to shorten the time over which you borrow and thus eliminate a dramatic amount of interest most effective in the beginning of the loan. On an amortization schedule you “walk forward” in the principal column and eliminate the commensurate interest—moving you forward in the loan. Print out a few possible amortization schedules from bankrate.com to take ownership of the loan. Take the time to work out the savings if you pay extra principal payments to see the possibilities of savings and double check the bank’s math.
This is the tip of the iceberg when it comes to financing a large project like a house. Preparing to obtain financing will draw on skills across several disciplines. Our housebuilding class features classes and workshops in Drafting, Model Building, Site Planning, House Design, and details, details that will make the final estimation of your project a rewarding experience. Our approach has been proven over the thirty years and thirty thousand Shelter Institute graduates!
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