$1.25M construction loan with no income?

[rmcelwee]

We have only contacted two banks so far. The first said we will loan you $650K (not nearly enough) and the second said they would do the full loan. Particulars:

1) They want us to pull $60K per quarter out of our 401K (not sure how they verify/enforce that) to produce "income". Not sure if our brokerage accts can be used vs 401K.
2) Roll our remaining $130K land loan into the mortgage.
3) It would be 10%-20% down (could not say for sure due to being a "non-standard" ICF house - underwriter will let us know).

We were in the car on vacation when they called so I wasn't in the position to ask a lot of questions. The payment was $8,000 per month but don't know if that covers PMI. To me, $240K per year sounds excessive for a $96K per year mortgage. I'd like secure a loan so I am not forced to pull a lot of money at one time out of investments.

I'm just looking for comments or suggestions at this point. We'd like to start our build this year so I need to get moving on this in the next couple of months.

 

[Sunset]

I would think they will enforce the $60K per quarter withdrawal by stopping handing out the loan if you fail to do the withdrawal. I suspect the construction loan will be handed out piecemeal as the construction progresses.

Seems to me you could after a delay of say 30 days, put 1 of the $60K back into another IRA. IRS allows only 1 per 365 days when you "touch" the money, but it would pull down the amount to $180K for the 12 month period.
If you timed it across tax years it would be $120K one year and just $60K the other year assuming you replace back the last pull.

 

[OldShooter]

In an unusual case like this I would talk to several more banks in person, emphasizing regional banks and credit unions. One thing to understand (and I don't) is whether they will keep a construction loan like this on on their books or resell it. If the answer is "resell" that probably makes for less flexibility on terms and more hoops to jump through. With luck and persistence you will probably find a banker who will teach you about the loan market you are trying to deal with.

 

[SecondCor521]

Reading between the lines, if you have no income and are contemplating a loan of that size, then you probably have a $MM portfolio.

To the extent that portfolio is in taxable, you might consider looking at some sort of asset backed loan where you pledge your taxable as collateral for the loan. My understanding is this approach can get you a lower rate because in cases of default, the lender could go after the home or the portfolio or both.

A portfolio margin loan is also technically a possibility. I wouldn't ever do one, but some people do. You subject yourself to margin call risk and interest rate risk, both of which are probably not to be taken lightly.

 

[Sunset]

OP - I'm curious, have you done construction before ?
My understanding is that it can be full of surprises and easy to overshoot the budget by 10->20 percent.

 

[rmcelwee]

OP - I'm curious, have you done construction before ?
My understanding is that it can be full of surprises and easy to overshoot the budget by 10->20 percent.

No I haven't. That is why we are hiring a general contractor (who will charge us 10->20 percent!).

 

[OldShooter]

No I haven't. That is why we are hiring a general contractor (who will charge us 10->20 percent!).

FWIW we are just finishing up a lake house in the same price range as yours and our GC is charging us 8%. This is a rural area. He is the top league guy in the area and has built the majority of the high-end homes. We didn't shop price at all; every recommendation we got pointed to this guy so we just signed up. 8% is the price he gave us.

 

[SecondCor521]

No I haven't. That is why we are hiring a general contractor (who will charge us 10->20 percent!).

It's not so much surprises as it is changes. Lots of people having homes built for them will change their mind on things as they go along. Change orders get very expensive very fast, mostly because of having to undo and redo stuff, as well as knock on effects.

We had a home built for us once, and our builder advised us to figure it out ahead of time and then try not to change our minds. We did that and things worked out just fine. The minor thing that got missed is that we changed the floorplan of the laundry room on the first floor, and the builder neglected to change the foundation plan to match. So our finished laundry room sat partially over garage flooring. Not a big deal, but it does illustrate how changes have ripple effects that are hard to manage.

 

[Franklin]

Reading between the lines, if you have no income and are contemplating a loan of that size, then you probably have a $MM portfolio.

To the extent that portfolio is in taxable, you might consider looking at some sort of asset backed loan where you pledge your taxable as collateral for the loan. My understanding is this approach can get you a lower rate because in cases of default, the lender could go after the home or the portfolio or both.

A portfolio margin loan is also technically a possibility. I wouldn't ever do one, but some people do. You subject yourself to margin call risk and interest rate risk, both of which are probably not to be taken lightly.

I did a margin loan this year for the first time. Son was buying a house and I needed to come up with $ quickly. I had an account at ML and borrowed off my taxable bonds and stocks. To get $1.2MM in cash you would need a taxable account with about $1.7MM in equity (it is margined). The rate when I started was 2.6% but recently rose to 7.8%. That was an eyeopener so I found a better way to pay it off. Perhaps a combo loan against your taxable stash and a construction loan. I assume you would get a regular mortgage at completion to pay it all off. A construction loan of that size would make me nervous. Both my brother in law and father in law are top tier builders and they both charged me more than your 8%. So, sounds like your builder is a good deal. Enjoy your new home!!

 

[SnowballCamper]

I'm just looking for comments or suggestions at this point. We'd like to start our build this year so I need to get moving on this in the next couple of months.

We did a construction loan for our house and had the architect, general contractor, and builder all in one business. Only specialty trades were bid out (plumbing, electrical, drywall, paint). From deposit to occupancy was over a year, after six months of waiting in the queue. We did no change orders, but there was one increase for lumber (this was years before the pandemic issues).

It appears the bank might want IRA withdrawals to meet a 40% threshold for mortgage payment to income ratio? Probably just a number the underwriters need to see.

Also, our construction loan had some fine print about all the payments going through the bank, which we almost busted with down payment(s). Every month or so of construction the GC sends an invoice to the bank, and a bank person checks progress with a site visit, and then issues the check. There was some special insurance coverage required too, to cover the building materials delivered to the site, but not actually part of the house yet?

In WA the state charges sales tax on new construction... so watch out for that in your state, it was a wallop for us.

Good Luck!