Financing Booklet For Your Dome
This web site file contains the 18 page Financing Booklet For Your Dome
Creative Financing For Your Dome. © American Ingenuity – Booklet is copyrighted
A Construction Loan was issued by AG South Farm Credit, ACA in Laurens, SC for Ai ome home to be built in the area because the dome buyer had rural ag land. Their number is 864-984-3379.
Ai has learned about LightStream’s Anything Loan, a division of SunTrust Bank. Not sure if they can assist you or not. LightStream’s Anything Loan is a virtually paperless loan that will let you finance or refinance almost anything. These loans are very customer friendly with these included features:
Fixed-interest rates range from 1.99% to 9.99%* APR with AutoPay
Loan amounts range from $5,000 to $100,000
No fees, down payment requirements or prepayment penalties
Apply online and receive a response within minutes during business hours
Unsecured, with no liens or collateral requirements for AnythingLoan. (Applicants that do not qualify for the AnythingLoan may qualify for our Secured Loan products).
- take out an equity line on property you own
- obtain a personal loan from family or friends (offering them a higher interest rate than banks, etc. are offering on money market certificates, etc.)
The booklet below gives alternatives to lender financing: i.e. equity loans on property, family financing, stage financing, etc.
YOUR GUIDE TO THIS BOOKLET’S CONTENTS
BEFORE YOU BEGIN:
A STARTING NOTE… 1
PLAN THE COST OF YOUR DOME 2
THE MANY ROUTES TO YOUR DOME 3
HOME EQUITY LOAN 4
FAMILY FINANCING 5
STAGE FINANCING 6
BOOTSTRAP FINANCING 7
OTHER ROUTES 8
THE MORTGAGE ROUTE:
PERMANENT MORTGAGE 9
HOW MUCH CAN YOU BORROW? 10
PRINCIPAL & INTEREST PAYMENT CHART 11
YOUR CONSTRUCTION LOAN 12
OWNER/BUILDER FINANCING 13
YOUR MORTGAGE & THE U.S.GOVERNMENT 15
FINDING THE RIGHT MORTGAGE LENDER 16
BEGIN THE ELIMINATION PROCESS 17
UNDERSTANDING THE JARGON 19
A STARTING NOTE…
You are an individual – a creative individual. You feel it is time to invest in your own home – one of the best investments to be made. But you’ve been looking at the new homes currently being built and you feel they’re missing something. You are not impressed.
That’s because the one-size-fits-all house just doesn’t fit you and your family. You want more from a house. A home that will work for you. Increase your investment. One that will express your individuality. The established construction industry is set up to turn out mundane little boxes that are all alike. They just can’t deliver what you demand. You’ve decided a dome is for you.
You’ve let your mind wander ahead and imagined all kinds of wonderful things about your new dome: Your family snugly gathered about the great room fireplace as you orchestrate a feast from your efficient new kitchen. A huge Christmas tree soaring up in the cathedral ceiling.
Even the thought of designing and building your dome is enticing. It’s like the ultimate model airplane kit, compelling crossword puzzle, intriguing science project, and magnificent sculpture all rolled into one.
But now, what about the where-with-all to build this spectacular new dream home? Where will it come from?
Considering sources for financing your new home can be overwhelming. But don’t let all the ins and outs, odd language, and intimidation of the financing dragon put you off. You’re determined. You’re creative. You’re special. You’re going to be a dome owner.
Let’s talk money.
If you are likely to need financial assistance to build your dome, think about the Lender’s point of view while you are selecting a floor plan. Stay close to the 3 bedroom, 2 bath concept which has the highest demand on the resale market. Although you may never sell your dream home and may not care about the resale value, the Lender and the Appraiser consider it very important.
The more money the Lender contributes, the more they will want to see money spent on a resalable design. Omit the custom designs until you are sure there is money for the basics. Once you have a floor plan in mind, it’s time to figure what it will cost you to build your dome. Remember that the price of a dome kit represents only a part of the total cost of your new home. You must also take into consideration the cost of:
- A foundation and site work
- Electrical, plumbing, heating and air conditioning systems
- Interior finish not included with the kit
- Exterior finish not included with the kit
- Cabinetry and fixtures
- Permitting fees
- Architectural, engineering, and loan fees
Using cost estimator’s guides from your library, bookstore, or kit supplier, price out the cost to build your dream home. In order to do that, you will need to know what you would like to have in your home. The most direct route is to make two lists: a Wish List and a Need List. Email us and ask Ai for a document titled “Dome Too Large” that lists the perils of building too large a dome.
The Wish List is everything you’d really like to see in your home (built-in cabinets, stone exterior, Italian tile floors, etc.).
A scrapbook or file folder to collect all your notes, pictures, and articles will be helpful. Not all will survive but for now consider them. It might be more practical to add them after you’ve moved in.
The Need List is made up of all those needs that are vital to your new dome.
Check both lists to see if items might be moved from one to the other. Put the most important items at the top and the real extras at the bottom.
Price out the items on your lists and see just how much fits into your budget. Items from the bottom of your Wish List will be cut or compromised first.
If your Need List exceeds your budget, then see what can be changed:
- Can the guest bath be smaller or less elegant?
- Can you combine the kitchen, dining room, and living room into one huge great room?
- Can you build a smaller dome?
- What can be added later?
- What less costly substitutions can you make?
- Can you build a dome complex in stages?
- How can you cut down on construction costs?
To keep everything realistic throughout the planning of your new dome, list what finances are available to you:
- Equity in a building site (value of your land minus what is still owed)
- Equity in your current home (value minus what is still owed)
- Available credit with charge cards, unsecured loans, etc..
- Gifts from relatives
- Availability of a new mortgage
- Sellable items like boat, valuable collections, land, equipment
Your dome can be built with cash, loans, sweat equity, lots of creativity, and most likely, a combination of them all. Different sources of financing have varying costs, but keep in mind that even the most expensive route to your new dome will save you money in the long run. You’ll be investing in your own home rather than your landlord’s.
Don’t ever be afraid to ask questions, to educate yourself, to take time to discover just the right source of funds. Patience has its rewards.
Explore every avenue. Don’t rely solely on your current banker, horoscope, or your “good old Uncle Charlie” to find financing. Consult the experts: books, builders, small local banks, credit unions, lenders, and yourself.
Information on home financing is easy to obtain, financing is not. Like a race, the better prepared you are, the easier it will be. This booklet will get you off to a good start in the right direction. If some of the terms in our discussions are baffling, flip to
the back section “Understanding the Jargon” for a definition.
You may be sitting in one of the best sources of funds – your current home. If you have a small mortgage on a home in a neighborhood where property values have risen over the years, you already have easily accessible mortgage money. It is easier to get financing on an existing house than new construction since the lender’s risk is less.
Sources for home equity loans are banks, savings and loans, credit unions, home loan companies, and mortgage brokers. You will follow all the same procedures for obtaining a loan, with one exception. You will not need a construction loan, so you can eliminate all the paperwork having to do with it.
Banks, savings and loan, or other loan companies usually offer a credit line or personal loans secured by the equity in your current home. The larger the equity, the larger the loan. Credit lines are often advertised to be used for home improvements such as pools, additions, or remodeling, although they could be for your new dome, the lender may process a 2nd mortgage on your home.
You may be in the position to refinance your home with a larger mortgage. If your equity is large enough and your construction budget is small enough, you can pay off the current mortgage and have sufficient funds left over to pay for the construction of your dome.
If your equity is smaller, you may still have enough to refinance or obtain a second mortgage for working capital to augment funds from other sources such as family or bootstrap financing.
A definite advantage is that having a large, assumable mortgage on your home may actually help to sell it once you have moved into your new dome. Potential buyers will have lower closing costs and less processing time than with a new mortgage.
If you are in a special family with a strong relationship, you might approach them as a source. You’d much rather have someone you love receiving the interest from your mortgage.
Remember in all your discussions to be just as professional as with an institution. Treat Aunt Martha and Uncle Henry with as much (or more) respect as the First National Bank.
Make your presentation to them providing many of the same documents like you would other lenders. Suggest they look it over and take time to make their decision on the investment.
When terms are agreed upon, put all the agreements into an enforceable written contract that can be referred to in the future. You never know when Uncle Henry might die and Aunt Martha’s memory may fade. Protect yourself and your benevolent relative.
You might approach your family for just a short-term loan, which combined with some bootstrap financing, could see you through construction. Once your dome is completed you will have an appraisable property, rather than just plans, for a lender to consider. Then use the proceeds from the permanent mortgage to pay off your loans to your relatives.
Be sure to be conservative and accurate in your cost estimates. You want to avoid any possibility of getting in so deep to the relatives that a permanent mortgage can’t get you out.
With any family financing – whether it’s a large permanent mortgage, or a small short-term loan – keep everything in a business perspective.
Some families build a complex of domes, one at a time, spreading the construction and the costs over several years. With stage financing you finance each dome’s construction separately as it is completed. You can use family financing, a home equity loan, bootstrap financing, a construction loan, or a combination of financing methods over the years to complete your dream dome complex.
For a lender considering you for a construction loan, stage financing has the advantage of building confidence in your construction abilities and loan payment history.
The combinations and time frame are uniquely flexible with domes. Since each structure is self-supporting and stands alone, a main dome can be built, then additional domes can be built at any time and simply linked to each other.
For example, start by building a single dome with a great room, kitchen, bedroom, bath, and an upstairs sleeping or guest loft. Then, as your family size increases, enlarge your home to include a second dome with a laundry room and additional bedrooms or a grand master suite. Also, as savings increase, add a garage dome with an office or family room loft. As your needs and finances grow with time, you can build additional domes to adjoin the main dome.
Stage financing is a great way to spread costs over a period of time while using it as a weekend retreat.
Build a small cabin-sized dome at first, then add to it during vacations. It’s a satisfying way to spend your time away from home and office, especially if you are the creative owner-builder type.
As an owner-builder, you could even manage to pay for the construction of your new dome out of pocket as you go. Impossible you say? Think again. Hundreds of families finance their domes this way, and you can, too. You just build more with your brains than your billfold. It is not the easiest or quickest route to a new dome, but it just might be the most satisfying.
Build up a sizable nest egg through frugality and put yourself on a strict budget both in living expenses and building costs. If you don’t absolutely have to have it, forget it – and spend the savings on building materials. Put all you can into a building fund. Give up habits like eating lunch out – brown bag it instead.
Time is your biggest ally, since the more time you take, the more opportunity you have to save. Patience is needed, but don’t take so long that your dream fades.
Short Term Loan
Don’t overlook the opportunity to ease cash flow over a short term during construction by granting you a short-term loan using credit cards, a credit line, or a home equity loan.
The extra expense of their higher interest rates may be justifiable because you eliminate many costs associated with a lower interest mortgage. If you can also save the time and money associated with renting inefficient housing and looking for contractors and lenders, the higher interest loan may cost less. However, their justification can be lost with large amounts that take too long to pay off.
Seller Financed Land
If you have not yet purchased your building site, look for properties where the seller will finance all or part of your land purchase.
Offer to make payments to the seller. Having an attorney who represents both of you prepare the papers will put the seller at ease and be a worthwhile investment. You may have several offers on different properties rejected before you find a willing seller, but you’ll have your financing.
Put as much sweat equity into your home as possible by doing as much of the labor as you can. The more you and your family can learn to do, the more you can save. Visit the library or a bookstore for a full range of understandable books on all phases of construction. Also, much instructional material is now available on videocassette.
Time is your biggest friend. With no lender to please, you can take as much time as you can afford to give to the project.
Your construction dollar can go a lot further than you ever imagined if you just put your creativity to work. Search and scavenge classified ads, garage sales, and lumberyard back lots. Look for:
- Close-out merchandise
- Discontinued stock
- Odd lot items
- Used building materials
There are lots of bargains out there. You’ll really be surprised at the special touches you can add without busting your budget.
You can also save a great deal on materials that are just as serviceable, but lack the decorator touch. You may scoff at this, saying you don’t want to live in a home with $10 porcelain light fixtures instead of $100 brass ones, but think about it.
Mortgage Free Home
If you and your family build your dome using bootstrap financing, you will give yourselves a rare gift to be proud of – living in a mortgage-free home. Instead of making payments, you can make improvements.
Another approach may be to think beyond just your home. A multi-family dome complex may fit your needs exactly. You can share the costs, debts, responsibilities, and joys of dome living with others.
Multi-family housing, such as a duplex, often has lower land acquisition costs per unit and lesser construction costs per square foot than single family residential housing.
A dome complex, made of separate but linked domes, is perfectly suited for this. But be sure to scrutinize zoning laws.
And, for heaven’s sake, be absolutely sure of your compatibility with your choice of co-Dome owner’s. Rely only on a relationship that has stood the test of time and troubles.
A variation of this is to finance and build a multi-family dome complex, then rent the additional units. Note that financing an owner-occupied income producing property has a different set of qualifying standards. Although rarely done, it could be an especially satisfying business venture in a tourist area such as a lake or beach.
Home & Business
Are you a one person business such as a C.P.A., manufacturer’s representative, or service repairman? Why maintain a separate office and its overhead?
A possibility that might work for you is to consolidate personal and business-housing expenses for mortgage, utilities, insurance, etc. A multi dome complex works exceptionally well, with the office in a separate dome from the living areas of your home. A bonus is the elimination of the time and expense of commuting to an office.
Verify viability of this attractive plan in your area with the zoning office. These guys are notorious for being real nitpickers.
The typical method of financing new construction is to secure a short-term construction loan, which is paid off and replaced by a long term, or permanent mortgage. The same lender may provide both. The construction loan is explained later on page 16.
Financing a dome is more difficult than obtaining a mortgage to build a typical home because lenders are very conservative and they may question the resale value just in case you are run over by a truck and they have to sell the dome. Thousands of domes have been built in recent years, but they are still very much in the minority. Many lenders feel that domes have yet to prove themselves in the long run. So they are understandably hesitant to risk their institution’s money on an unfamiliar structure as well as an unfamiliar person.
But you have the knowledge and the determination to change this. Familiarize them with the dome as you acquaint them with yourself. It’s up to you to sell yourself and the value of your dome.
Bankers are a tough bunch, right? Not necessarily. The personalities of lenders are changing. Today a Loan Officer is just as likely to be a single woman who lives in a stilt house on the river and drives a VW, as the stereotypical stiff collared traditionalist who is chauffeured from his estate in a Lincoln.
Take the right approach: a positive one. This is a very important business arrangement between associates, not an emotional tug-o-war.
HOW MUCH CAN YOU BORROW?
If you decide to pursue a mortgage route, you should know approximately what potential lenders would loan you. There are some basic rules of thumb that can help you in figuring your…
BASED ON LOAN-TO-VALUE
A lender will only loan you a percentage of the value of your building site and your completed dome, expecting you to also contribute a percentage (usually 20-30%). Comparing the maximum amount a lender will loan to the total value of your land and home is referred to as the loan-to-value ratio.
If the combined estimated value of your completed project (including land, home, and all the improvements) will be $100,000, and the loan-to-value ratio of a particular loan is 70%, then the most they will loan you is $70,000. Your contribution must be 30% or $30,000 in the form of your equity in the land, available cash, and deposits on the Building Kit.
In other words, the percentage you must contribute (determined by Loan-To-Value ratio) and the value of your contributions will determine the maximum amount you can borrow. For example, if your equity, cash and deposits equal $30,000, the Loan-To-Value is 70% and your required contribution is 30%. Your maximum mortgage is $30,000 divided by 30, then multiplied by 70, which equals $70,000.
Your land equity, available cash, and deposits … $____________
Divided by your required contributing percentage … ¸________
Multiplied by Loan-To-Value % … x________
Equals your maximum mortgage … =$____________
Increasing the amount you’re asking the lender to put into this project increases his risk and reduces yours. If you need to raise the loan-to-value ratio because of limited funds and have excellent credit qualifications, your lender may allow you to purchase mortgage insurance to offset their increased risk.
BASED ON INCOME
Mortgage lenders want to be assured that you will be able to repay the loan. Therefore, your Family Income will limit the amount of your mortgage. For a rough estimate multiply your total family’s yearly income by 2 to 2½.
For example, if you earn $25,000 a year, you can plan to borrow a maximum of $50,000 to 62,500.
Your family’s gross annual income … $_____________
Multiplied by 2 and 2½ … x 2 & 2½
Equals your maximum mortgage … $___________
Maximum Monthly Principal & Interest Payment (P&I)
Lenders also calculate the maximum amount you can safely spend each month on P&I payments to decide the maximum mortgage for which you will qualify. Lenders establish the percentage of a family’s income that can safely be allocated to paying their housing cost. The percentage is based on factors such as credit worthiness and employment history. The housing cost includes taxes, insurance, and P&I payments.
For example, a typical percentage of 28 and that same $25,000 income establishes a maximum housing cost of $7,000 per year. Subtracting $1,000 for taxes and insurance leaves $6,000 (or $500 per month) available to pay P&I.
Your family’s gross annual income … $_____________
Multiplied by 28% … x .28
Subtracting yearly taxes & insurance… –___________
Divided by 12 … ¸ 12
Equals maximum P&I payments … =$___________
Your Family’s debt obligations may further restrict your P&I payments. Add up your debt obligations for the next year, eg.: car payments, credit card debt, child support, etc..
Multiply your annual income by 36%, then subtract your long term debt payments to obtain your maximum yearly housing costs, then divide by 12.
Your family’s gross annual income … $_____________
Multiplied by 36% … x .36
Subtracting long term debt… –___________
Divided by 12 … ¸ 12
Equals maximum P&I payments … =$___________
If this is less than the previously estimated P&I, it may be to your advantage to reduce your obligations before applying for a mortgage. Assistance from relatives may be of help on this as long as you are not adding another obligation for the lender to consider.
BASED ON P&I PAYMENTS
Knowing your maximum P&I payment and the interest rate that is available, you can determine your maximum mortgage. Use the 30 year or 15 year chart on the next page. Go down the column that matches your available interest rate until you find the P&I payment that most closely matches yours. Then read the maximum mortgage amount in the left column.
Your maximum mortgage was also calculated on pages 12 and 13. The factors that produce the lower maximum mortgage are the things you need to improve to qualify for a larger loan. Shop for a better loan-to-value ratio, reduce your debt, and increase your equity, available cash or income.
ESTIMATED MONTHLY P&I PAYMENTS FOR 30 YEAR LOAN
7% 8% 9% 10% 11% 12%
$25,000 167. 183. 201. 219. 238. 257.
30,000 200. 221. 241. 263. 286. 309.
35,000 233. 257. 282. 307. 333. 360.
40,000 267. 294. 322. 351. 381. 411.
45,000 300. 331. 362. 394. 429. 463.
50,000 333. 367. 402. 439. 476. 514.
55,000 367. 404. 443. 483. 524. 565.
60,000 400. 441. 483. 527. 571. 617.
65,000 433. 477. 523. 570. 619. 669.
70,000 466. 514. 563. 614. 667. 720.
75,000 500. 550. 603. 658. 714. 772.
80,000 533. 587. 644. 702. 762. 823.
85,000 566. 624. 684. 746. 809. 874.
90,000 600. 661. 724. 790. 857. 926.
95,000 633. 698. 765. 834. 905. 978.
100,000 666. 734. 804. 878. 952. 1,029.
ESTIMATED MONTHLY P&I PAYMENT FOR 15 YEAR LOAN
7% 8% 9% 10% 11% 12%
$25,000 225. 239. 254. 269. 284. 300.
30,000 270. 287. 305. 323. 341. 360.
35,000 315. 335. 355. 376. 398. 420.
40,000 360. 382. 406. 430. 455. 480.
45,000 405. 430. 456. 484. 512. 540.
50,000 450. 478. 508. 538. 569. 601.
55,000 494. 526. 558. 591. 625. 661.
60,000 539. 574. 609. 645. 682. 721.
65,000 584. 621. 660. 699. 739. 781.
70,000 629. 669. 711. 753. 796. 841.
75,000 674. 717. 761. 806. 853. 901.
80,000 719. 765. 812. 860. 910. 961.
85,000 764. 813. 863. 914. 966. 1,021.
90,000 809. 860. 914. 968. 1,023. 1,081.
95,000 854. 908. 964. 1,021. 1,080. 1,141.
100,000 899. 956. 1,015. 1,076. 1,137. 1,201.
Your Construction Loan
A short-term construction loan provides the funds to build the house and when it is complete that loan is replaced by a permanent mortgage.
The loans may be from separate lenders, or one lender may make both loans. Often a lender may combine the two loans in the form of a combination loan. It is the same as two loans, but you only have one closing and it converts automatically to a permanent mortgage. You can save on closing costs and hassles, but you could lose the freedom of shopping for another lender if rates change appreciably during the time of construction.
A construction loan is doled out in partial payments to the builder as the work progresses. You will not receive any money in advance, so plan to have sufficient cash on hand to pay for construction up to the first draw.
Often these draws are dispersed after visits by the lender’s inspector to verify that each phase of construction is finished. They correspond with the stages of construction such as foundation, rough framing, rough electrical and plumbing, etc.
For example, one lender uses the following draw schedule for kit built homes:
- 1st draw 15% Foundation and floor complete with rough plumbing
- 2nd draw 30% House package erected with interior framing
- 3rd draw 20% Rough electric, plumbing and A/C ducts installed
- 4th draw 20% Exterior and interior walls completed, cabinets and vanities installed
- 5th draw 15% All remaining improvements completed and improved
A construction loan is typically for 6 months to a year with a usual rate a few points above the prevailing prime rate. In addition to interest payments, there are one time up front service charges, usually several points. You pay monthly interest charges as they accrue, and the loan has a balloon payment of all the principal at the end of the term, which is paid by the permanent mortgage.
Lenders may take one of two approaches to figuring interest. There is a difference, so check to see which method each lender uses, so you may comparison shop.
- Interest is paid monthly based on the entire loan amount from the day the loan is granted.
- Interest is calculated only on the amount drawn. For example, if only 1/10th of the loan amount has been drawn, then you only pay interest on 1/10th of the total loan amount. Preferable, if you can get it.
If you are considering building your dome yourself, lenders will feel they are taking on a bigger risk, so they will be even more reluctant to grant you a loan.
They would feel more comfortable with a contractor that would guarantee a fixed cost and completion date. In some states it is not too difficult to become a contractor and form a company. If the idea of becoming a builder interests you and you end up with dome building experience, list your name with the kit manufacturer who likely knows others who need their dome built.
Avoid a common contractor/builder trap:
Not having enough money to complete each stage of construction so the lenders will issue the next draw (check).
The lenders dole out the loan after the work is complete. The catch is to have sufficient cash and resources to assure that each phase is completed. Be sure that you understand the lenders draw schedule and that wishful thinking does not lure you into unrealistically low cost estimates. See sample Draw Schedule on page 16. If you find this to be too rocky a road, you may wish to stick with a contractor or pursue alternatives such as family financing, stage financing, or bootstrap financing.
Mortgage lenders require an appraisal to help them determine how much your property will be worth once your new home is completed. The appraiser will make a judgement as to the value of your completed dome based on many factors including:
- Market value of the homesite based on zoning and sales value of comparable properties in the neighborhood
- Improvements to the property such as fencing, ponds, docks, outbuildings, or extensive landscaping
- Advancements available to the homesite such as sidewalks, drainage, streetlights, or fire hydrants
- Type of construction
- Square footage of living and utility areas
- Luxury fixtures included in construction
- Quality of construction
- Marketability and sales price of the completed home and property if the lender must take possession
If possible obtain one appraisal that is acceptable to all the lenders you are considering. A single appraisal will save you time and the extra expense of duplicate appraisals. An appraisal from a designated professional appraiser, such as an SRA or MAI, will be the most comprehensive and most widely accepted, but may also be the most expensive.
It is also very important that you select the appraiser and spend whatever time it takes until you get someone who has a positive attitude about domes. After you have paid your money, you don’t want to find out that they are as resourceful as a square house. A pessimistic appraiser can kill the whole deal. Ask what they will do about comparables and assist them in locating unique houses in your area.
Many appraisers find it difficult to establish a market value on a dome house. They may also believe that it is necessary to have a “comparable” sale of another dome in your area. Fannie Mae (see Secondary Mortgage Market” page 22), the nations largest source of home mortgage funds, gives special consideration to unique housing.
Be sure your appraiser is aware of the Fannie Mae “Selling Guide” manual concerning unique housing. Chapter 4, Section 401.01, pages 755 and 756 explains!
Geodesic domes, etc. are eligible if both the appraiser and the underwriter (lender) determine there is sufficient information to develop a reliable estimate of market value. It is not necessary to have comparable sales of other domes if the appraiser is able to determine sound adjustments for the difference in the homes used for comparison; he can demonstrate the marketability of the dome based on older sales. Sales in competing neighborhoods or the existence (without a sale) of similar homes in the area, or any other reliable data. For a list of Fannie Mae mortgage lenders in your area, call 1-800-732-6643. Avoid lenders that sell their mortgages to Freddie Mac, because their appraisal guidelines are more restrictive.
YOUR MORTGAGE & THE U.S. GOVERNMENT
Without being a mortgage company making direct loans, the federal government plays a major role in home financing. Through broad, powerful legislation and many government and government sponsored agencies, it carries a great deal of influence over many of the details and requirements of your home mortgage.
Congress passed the Real Estate Settlement Procedure Act (RESPA) in the mid-1970’s to protect mortgage borrowers. Under this legislation the lender must provide you with certain information after loan application, including a good faith estimate of your settlement costs. After closing they must provide a uniform settlement statement which itemizes those costs.
The Truth-In-Lending Act requires lending institutions to give borrowers complete information on the real cost of borrowing money. They must provide you with a truth-in-lending statement outlining all your costs connected with obtaining and maintaining your mortgage and any penalty payments.
Fair Credit Reporting Act
The Fair Credit Reporting Act assures that you can review and challenge your credit report and request inaccurate information be corrected.
The Equal Credit Opportunity Act
The Equal Credit Opportunity Act prohibits lenders from discriminating against you on the basis of race, color, religion, national origin, sex, marital status, age, or because income is from any public assistance program.
Your mortgage could be obtained through one of the many programs offered by the Federal Housing Administration (FHA).
Although your local lender does the actual lending, the federal government gives the lender insurance or guarantees.
Secondary Mortgage Market
Government agencies also affect the mortgage process by the creation of a cycle of funds, which keeps money circulating through the financial marketplace so that more loans may be made. Federally sponsored agencies, the Federal National Mortgage Association (alias Fannie Mae), the Government National Mortgage Association (alias Fannie Mae), and the Federal Home Loan Mortgage Corporation (alias Freddie Mac) purchase mortgages from lenders.
The lenders are then able to make more mortgages, which results in more homes being built. The lender benefits because they can make more profit and have the ability to increase their cash reserves on short notice. The borrower benefits because a steady supply of mortgage money is available. Investors benefit because they can buy securities backed by the mortgages from the government agencies in an open market.
The lenders must conform to the requirements regarding loan application practices and qualifications if they want to sell their mortgages in this huge secondary mortgage market. So when they consider granting you a mortgage, they will compare the qualifications of you and your dome against the agency’s guidelines.
Since your mortgage will probably be sold in the secondary mortgage market, your lender will follow the guidelines of the agency(s) buying their mortgages. Their underwriting guidelines specify numerous conditions and requirements of the mortgage, including the appraisal.
FINDING THE RIGHT MORTGAGE LENDER
If you will be building your new dome with a mortgage, arranging for financing is the primary item on your list. You will want to begin your search as soon as you can. Finding the right lender can be a time-consuming process and you want to be thorough. Once you have blueprints prepared and a homesite selected, it is time to secure a source of funding for the project.
Speak to as many lenders as practical at one time; in particular contact small local banks and local credit unions. You wouldn’t want to spend weeks awaiting an answer, find out funds were not available for your type of loan and then have to start over with another lender. Before you pay the application fee, try to persuade the Loan Officer to present your application to the approval committee. Explain that you would not like to pay a fee and have them go through the complete process if the committee will not accept dome housing.
When comparing lenders you don’t have to spend any money to shop around. You can get information about home financing programs to make decisions by simply asking questions over the phone. You should know which lenders have the best programs for you, long before you need to fill out an application and pay an application fee.
Keep in mind that lenders do not loan money on the basis of your need but rather on your ability to repay it. Their prejudice seems to be based on a collective bad experience, always thinking in terms of the worst case scenario: They give you the money, a truck runs over you and you cannot make any payments. Can they sell your unfinished dome? If so, how much and how long will it take?
Be that as it may, it is difficult to argue with them, especially if you are not an experienced homebuilder. They need proof that you are competent, reliable, and trustworthy, and are building a marketable structure you will finish. Just telling them so is not enough they need proof.
Retaining this thought in the back of your mind will help you to anticipate a lot of their questions and, most of all, not to be intimidated or offended by them asking. If you were a lender you’d ask those questions too.
When shopping for lenders avoid focusing on interest rates and losing sight of the big picture. With a $50,000 loan for 30 years, a 1% higher interest rate will increase monthly payments by about $30. If you had to pay an additional $2,000 in closing costs to get 1% lower interest, it would take over 6 years of reduced payments to recover the added cost.
If the lenders with the lower rates decline your application, remind yourself that a higher interest mortgage on a home that you will own is better than rent payments. Also, you would likely save more in heating & A/C costs by owning a dome, than the cost incurred with higher interest rates. Also, refinancing later when the home is complete, property values have appreciated, interest rates are lower, and your credit worthiness improves, will lower your monthly payments.
Your first search for a lender might be the yellow pages under Mortgages, Loans, Banks, and Savings and Loans. They will generally fall in the following categories, although they may not be identified in the phone book.
Operating much like a real estate broker matching up people who want to buy and people who want to sell, mortgage brokers match up people who want to borrow with people who want to lend.
The lenders that the broker represents may be banking institutions, insurance companies, investment groups, or individuals. Since each of them has a different source of funds, they will have different criteria for making loans. They have the advantage of offering the most liberal and flexible conditions.
You will find your most sympathetic ear here, so even at a higher rate it is worth your time.
Differentiate mortgage brokers from all the other lenders in the phone book listed under mortgages. If you can’t tell who is which, call and ask.
While the most restrained in their loan practices, if you have a good working relationship with your bank, don’t overlook them as a valuable source for money or information. Be forewarned that their requirements can be frustrating and discouraging for dome builders.
Unlike commercial banks, they are not involved in deposits from individuals and businesses. They process mortgages, fund the loan and then sell the loan to an Investor.
Savings and Loans
Even though S&L’s have had their ups and downs over the years, they are still the prime source for construction loans and home mortgages. They usually offer some of the best rates and terms, as well as offering governmental backed mortgages such as FHA and VA. But like the banks, their conservative nature can be disheartening.
Home Loan Companies
Operating as personal finance companies to fund projects such as a new pool or bill consolidation, they can be a source for hassle-free construction funds. They usually charge higher fees and interest, however.
Although most of the loans to their members are for cars or furniture, some credit unions are making real estate loans at reasonable rates. If you belong to one, check it out..
BEGIN THE ELIMINATION PROCESS
Let your fingers do the walking as you travel the financing route. Compare lenders by asking them all the same set of questions over the phone.
When you call each lender:
- Have an idea of the type of loan you want…fixed rate, variable rate, 20 year, 30 year…it makes you appear more knowledgeable and conserves their time.
- Ask to speak to a Loan Officer about a new mortgage.
- Introduce yourself and say that you are planning to build a new home soon and that you would like some information on their financing programs.
- Advise the Loan Officer of the type of loan you want and that you would like to ask a few questions to determine if you should pursue the loan with them. Write down the answers for later comparison. Start with:
- What are your current interest rates?
- What are the points charged on the various types of loans?
- Are loans available to owner/builders?
- Do you provide a construction loan?
- Is there a loan origination fee?
- “I plan to build a dome home, will that present a problem?”
- Is there an application fee?
If so, how much?
- “I’m concerned that I could prepare an application, pay a fee and later be declined simply because I’m building a dome. How can I avoid this?”
- Are there other fees?
- Explain to each prospective lender that you want to acquire one appraisal that will satisfy them and the other lenders you are considering. Then ask:
- May I provide the appraisal?
- What type of appraisal is acceptable?
If any of the answers disqualify you, politely explain and thank them for their assistance. If conditions change, you may call again, but for now spend the time looking for your best lenders.
If their answers are acceptable, arrange a time that you can stop in and pick up an application. It is best to fill out the application at home when you have plenty of time. Sometimes they may have printed information describing each loan and a list of documents to submit with the application.
While you are there, you may also inquire about the following:
- Is there a prepayment penalty on any of the loans?
- Will I have to pay a fee if I pay off the mortgage before the end of its term? (Important if you refinance when rates go down, or if you might move.)
- Do you have preferred customer benefits?
- Do you offer lower rates if I use other services you offer? Are other services offered at a lower cost to borrowers?
- How long will a mortgage decision take after application has been made?
The lender wants to know what the loan is for and how it will be paid back. Convincing them that the proposed plans are sound and that you are able to repay the loan is your main objective.
A good presentation can make or break your chances of getting a loan. Financing, like the entire home construction process, should be viewed as a business project. The lender is your partner in this transaction, not your dictator or adversary.
What is Important to You?
Update your credit. This is no time to be confused with the other John Doe, Mr. Bad Debt. Check with the local credit-reporting agency for accuracy. A computer printout listing all the information on your credit history as it is being reported can be obtained for a small fee from the following credit-reporting agencies. TRW may provide the first report free, otherwise have your credit card in hand to charge the $8.00 fee.
- TRW (800) 392-1122
- Trans Union (216) 779-7200
- Equifax (800) 685-1111
- CSC Credit (800) 759-5979
Try to borrow enough to cover your worse case, with the lowest possible payments, for the longest period of time.
If you are frugal during construction and don’t use the entire loan, you need not take it all in your permanent mortgage (and pay interest on it).
All your paperwork should be neat, legible, and skillfully presented and should show a complete overview of your proposed financial plans. Scribbling on the back of an envelope scare lenders. They are captivated by quantities of paperwork and figures – it fills their professional lives. If the figures and calculations seem well researched and valid, they’ll be impressed.
Prepare a package for the lender to use when he presents your loan application to the loan committee. Include the following: A complete breakdown of your mortgage needs, including cost estimates on construction… by whom, how much, for what, and when. The lender may not understand it all, but they’ll be impressed by the effort that went into it, and it will soothe a lot of fears of uncalculated cost overruns.
Completed application that was provided by that lender. Plus, the documents that they request which may not be listed below:
- A check or payment for the application fees.
- Copies of homesite deed, survey, and site plan
- Copies of Building Plans. Usually 8½ x 11 photocopies are preferred
- Copies of dome company promotional materials such as brochures and videos
- Copy of Appraisal
- Income tax returns for the past 3 years
- Profit and Loss Statements for the past 3 years if you are self employed
- Employment history for recent years including name, address, and phone number for each employer
- Recent pay check stubs
- History of your current mortgage or rental payments
- Divorce documents and copies showing a history of payment if alimony or child support payments will be considered as part of your income
- Letters of explanation for any credit glitches or gaps in your employment
- Copies of all the sales documents relating to the purchase of your building site if recent, or relating to the sale of your current home if applicable
- Copies of your survey, homeowner’s and title insurance policies if you are refinancing your current home
Personally contact the lender and be dressed in businesslike attire. Maintain eye contact and address the lender by name as often as possible. Avoid slang and street language.
Avoid financing phobia. That’s your inability to adequately express yourself at a face-to-face meeting. Your fearful nervousness and uneasiness implies a lack of strength and confidence. You can overcome it.
Fear is usually caused by a lack of preparedness. Follow the trusted Scout motto: Be Prepared. It instills confidence. If the lender asks a question you can’t answer, promptly and confidently reply, “I’ll find out and let you know.” Then do so.
When meeting a lender act as if you’re equals. Meet on equal terms. Don’t shrink as if your future is in his hands. He knows you need money, or you wouldn’t be there. Just be straightforward and present yourself as the person who can accomplish your goals.
Monthly Energy Costs
Also discuss with your prospective lenders the superb energy efficiency of your dome, which could affect your total monthly housing costs. Building an energy efficient home can be rewarded with more lenient qualifying standards – your lower monthly energy costs can offset a higher monthly principal and interest payment.
Fannie Mae Guidelines
Be sure to point out that under Fannie Mae Underwriting Guidelines, domes may be compared to distinctive custom designed homes.
Mortgages on these types of properties can be sold in the Fannie Mae secondary mortgage market as long as the properties conform to all the aspects of their guidelines. Of course, the lender needs to be sure that the neighborhood and the quality of the construction measures up to criteria such as loan-to-value ratio and market value.
If you equip your energy saving dome with comparably insulated doors and windows and an efficient heating and air-conditioning system, your lender may apply the energy efficient properties sections of the Fannie Mae Underwriting Guidelines. This could give you more favorable mortgage terms, resulting in a larger mortgage for your qualifications.
Personal Financial Statement
Paint a full and true picture of your finances and employment record. The lender wants to be sure that construction won’t tap you out completely. Will there be enough cash left to handle emergencies?
Don’t let the lender find anything unexpectedly. It will send up a red flag at the least, and could be illegal at the worst. Avoid last minute surprises. Be up front with information. Reveal the good, the bad, and the ugly. If your mortgage payments were late a few times because of illness or a job layoff, tell them ahead of time.
If it becomes apparent at some point that the lender is not in sympathy with your proposal, it is best to ask what modifications would be needed that would make your application more attractive.
If the guy simply doesn’t like the loan under any circumstances, it might be best to just strike that lender from your list. Rise, smile, shake hands, thank him for his time, and wait until you’re outside before yelling and calling him a shortsighted dinosaur. With your short-term frustration vented, just head to the next lender on your list. If you’re creditworthy and you’ve put together a good presentation, someone will grant you a loan.
- Be professional and open minded
- Be enthusiastic
- Be confident and convincing
- Be honest and forthright
- Be thorough, but concise
After You Have Made Application
Don’t be too impatient. Give them some time. Yet, maintain communication. They may request additional information. Get it ASAP. Don’t let too much time lapse. Favorable impressions fade with time.
If Your Loan Application Is Refused
Ask the lender to take the time to go over your application and its failings. Be positive, not defensive or argumentative – learn from this.
Ask why you were turned down. The lender is required by law to tell you. The reason for refusal may have nothing to do with merit or your application.
You can’t change this lender’s mind, but maybe you can make some changes before you contact the next source. Correct any valid, concrete reasons for refusal (such as preparing yourself better, obtaining written verification of elusive financial details, or reducing the size of your planned home and therefore the size of the mortgage).
Get really determined and put your creativity to work. Consider alternatives for all or part of your needs such as stage financing or bootstrap financing.
Your drive, ambition, and desire to succeed should keep you talking to sources until you find one that says yes.
UNDERSTANDING THE JARGON
ADJUSTABLE RATE MORTGAGE: A mortgage which periodically adjusts its interest rate according to a fairly stable, outside index such as United States Treasury Bills. Most adjustable rate mortgages that change their rates up or down once a year, have a maximum rate change of 2% per year and 6% over the lifetime of loan.
AMORTIZATION: The gradual paying off what you owe on your mortgage by making regular installment payments. Part of each equal payment is principal, part interest. Since the interest is calculated monthly on the remaining balance, the part of your payment that is interest decreases with each payment and the part that is principal increases with each payment.
APPRAISAL and APPRAISAL FEE: An elaborate judgmental report determining the market value of your property and its improvements. For construction loans where the improvements do not yet exist, value is based on blueprints. The fee compensates the lender for the costs of hiring an independent appraiser.
BALLOON MORTGAGE: A large lump sum is due at the end of a short term (typically 3, 5, or 10 years) as the last payment of a mortgage. Monthly payments are amortized over a long period of time (typically 15, 20, or 30 years) so they are small, equal, and manageable.
CLOSING COSTS: Sometimes called settlement costs. All the expenses incurred in a loan transaction. They can be substantial and must be paid in full at closing (before finalization of your loan).
CONVERTIBLE RATE MORTGAGE: A mortgage which has a low interest rate in the first few years, often an adjustable rate, but which is converted in a later year to a fixed rate mortgage for the life of the loan.
CREDIT REPORT and CREDIT REPORT FEE: Obtained from a reporting agency for a fee, the report determines your financial obligations and history of payment.
DISCLOSURE REQUIREMENTS: Federal law requires every lending institution to provide its loan applicants with complete and accurate information about the actual cost of borrowing money.
EQUITY: The cash value of your property over and above the money owed on it (mortgages, second mortgages, liens, etc.). Almost invariably the amount of your equity grows over the years – it is the proverbial nest egg.
GRADUATED PAYMENT MORTGAGE: A mortgage whose payments gradually increase over the years. Lower payments in the first years help young homeowners with limited incomes manage mortgage payments. Theoretically, the payments increase as the income increases.
GROSS INCOME: Your total income from wages and commissions before any deductions are made such as taxes withheld.
INSPECTION FEE: Each time you request a construction loan draw, the lender will send a representative to inspect your construction site and could charge a fee.
INTEREST: What lenders charge borrowers over a period of time for using their money. Expressed as a percentage rate.
LOAN APPLICATION FEE: Not to be confused with the loan origination fee, this is a stated amount (usually $50 – $250) which the lender charges its customers for reviewing the application form with the opportunity (but not the guarantee) of obtaining a mortgage loan. It is not refundable if you are turned down.
LOAN ORIGINATION FEE: An extra charge, paid in cash at closing, that covers the lender’s administrative costs, such as reviewing your application, appraisals, obtaining and reviewing the credit report, and preparing documents. It is either a flat fee or a percentage of the loan.
LOAN-TO-VALUE RATIO: The percentage a lender will loan of the overall value of the property once your new home is complete.
MORTGAGE: A promise to pay back a loan, with real property as security. Simply stated, if you don’t pay off the loan, the lender, like the cartoon villain Snidely Whiplash, will take your property. In reality, foreclosure is a lengthy legal process.
MORTGAGE INSURANCE: A policy with an independent insurer against you defaulting on your mortgage. There’s no benefit in it for you except lenders will write mortgages with lower down payments, since their risk is lessened. It usually costs you a fee at closing and a percentage of the face value of the loan added to the monthly payment.
MORTGAGOR and MORTGAGEE: Always confusing! You, the borrower, are the mortgagor. You are the one who makes the promise to pay back the loan and offers up your property for collateral. The lender is the mortgagee, the one to whom the mortgage is given.
POINTS: Also called discount points or prepaid interest. Don’t get excited – it has nothing to do with a discount for you. It represents a discount on the value of your loan. They are most commonly charged when money is tight – the tighter the money supply, the more points you pay. Each point is equal to 1% of the face value of your loan. They are paid in cash at closing.
PRINCIPAL: The amount you borrow at the outset. Later, the amount you still owe. The amount upon which interest is calculated.
PURCHASE MONEY MORTGAGE: Also called seller financing. A mortgage that finances all or part of a purchase for a buyer and is held by the seller of the property.
RECORDING FEES: Minimal charges paid by the borrower at closing to record the mortgage with the Clerk of the Court – usually just a few dollars.
SELLER FINANCING: The owner of a property grants a purchase money mortgage to the buyer at closing. The buyer pays for the property over a period of time by making payments of principal and interest to the seller.
TERM: The life span of the mortgage expressed in years.
B U I L D I N G A D O M E ?
How will you finance it?
How much can you afford?
What are your sources for financing?
What do you ask lenders?
How do you better your chances of
getting a loan?
What are your alternatives to a mortgage?
8777 Holiday Springs Rd.
Rockledge, FL 32955-5805
Adjustable rate mortgage 61
Adjustable rate mortgages 68
Appraisals 13, 27, 28, 51, 62, 64
Balloon mortgages 19, 62
Banks 13, 49
Bootstrap financing 16, 44, 50, 51, 53, 55, 57
Building materials 55, 57, 68
Closing costs 17, 18, 20, 45, 50, 56, 62
Construction loans 13, 14, 18, 19, 22, 45, 49, 53, 62, 63
Credit card 56
Credit cards 48, 55
Credit line 56
Credit lines 48, 55
Credit reports 21, 26, 62, 64
Credit unions 13, 49
Disclosure requirements 20, 21, 63
Energy efficiency 15, 29, 41
Equal Credit Opportunity Act 21
Equity 63, 65
Ex Tech 233 22
Fair Credit Reporting Act 21
Family financing 16, 48, 51-53
Fannie Mae 23, 29, 42
FHA 13, 20-22, 29, 67
Financing phobia 41
FmHA 21, 22
Freddie Mac 23
Ginnie Mae 23
Graduated payment mortgages 63
Gross income 6, 45, 63, 66
Home and business 59
Home equity loans 48, 49, 53, 55, 68
Home loan companies 13, 49
Income tax 26, 40, 65
Inspections 18, 63
Interest 13, 17, 19, 21, 26, 36, 41, 51, 55, 61-63, 65-68
Key List 5, 10
Kit homes 41, 68
Loan application 20, 23, 40, 43, 63, 64
Loan origination fee 36, 64
Loan-to-value ratio 42, 64
Long term debt 6-8, 66
Maximum mortgage amount 6
Maximum monthly housing costs 6-8, 41, 66
Maximum mortgage amount 6
Mortgage brokers 12, 49
Mortgage companies 12, 49
mortgage insurance 65, 68
Mortgage types 68
Mortgage-free home 57
Multifamily dome 58
National Dome Council 15, 29
owner-builder 15, 54, 55, 67
Permanent mortgage 14, 18, 19, 26, 51, 52
Personal financial statement 42
Points 17, 19, 38, 65, 68
Principal 17, 19, 41, 61, 65, 66
Purchase money mortgage 56
Qualifying ratio 6, 42, 66
Recording fees 66
Refinancing 37, 40, 50, 67, 68
Savings and loans 13, 49
Secondary mortgage market 20, 23, 42
Seller financing 56
Settlement costs 20, 62
Short term loan 51, 55, 56
Sources for financing 12
Stage financing 16, 17, 44, 53, 54
Sweat equity 2, 56
Truth-In-Lending Act 21
VA 13, 20, 21, 29, 67
Wish List 5, 10