Process of buying a new construction home with cash

[GTFan]

The DW and I are going down to Melbourne, FL at the end of the month and as part of the trip are going to look at houses in Viera, specifically new construction options in the Bridgewater community. I know that the typical process is to get a construction loan with the builder paid in installments, is that how a contract is done with cash? Never bought a new house before, much less one with cash.

My strategy (if we find what we're looking for) is to get a portfolio backed loan at 3% or so from Schwab, then pay it back after we close on the new home and sell the old one. That way I can avoid selling investments until we move down there so we won't get hit with GA income tax, plus we won't have to sell as much upfront to raise the cash since we'll be using proceeds from old house to help pay off the loan. Looking for opinions from folks who have done this vs. getting a HELOC on the old house first etc. The Schwab option seems to be the quickest and easiest way to bridge over the old house to new vs. selling old, renting in FL and moving twice.

 

[RunningBum]

I had a home custom built. The builder had done many of these, and set up a % schedule based on progress. Each month they reported to me where they were at, and how much I owed. Periodically I'd verify the progress myself. With a construction loan my understanding is that the bank would send someone to do the verification. I had the cash available without needing my other house proceeds.

I bought another new house that was part of a development. I think I put down $1K or $3K earnest money, and we closed after construction was finished, so that was basically like buying any house. I had a mortgage on that one.

The portfolio loan gets risky if you are taking out a significant %, and leaving it open for a longer time. If the market drops, you could get hit with a margin call, and you'll have to sell some holdings at a low. That's why you might want to go with a construction or bridge loan, or a HELOC.

 

[GTFan]

Thanks for the response - we would only need up to 33% of the pledged portfolio value as a loan (and probably less), so with Schwab's requirement to keep min 70% LTV could sustain ~50% stock market loss before a margin call. Another deep financial crisis would have to happen in other words.

Interesting to hear that you were able to get a house built with only earnest money upfront. The problem I anticipate with a normal construction loan is that we don't have a high amount of taxable income, so qualification on a $400k or so house could be a pain.

 

[RunningBum]

Interesting to hear that you were able to get a house built with only earnest money upfront. The problem I anticipate with a normal construction loan is that we don't have a high amount of taxable income, so qualification on a $400k or so house could be a pain.

The house was going to be built whether we bought it or not. There was very little we were allowed to choose except wall paper, which probably had to be one from their choices. I can't even remember if we got to choose paint color, inside or out. If we backed out on the house, they would just sell it to someone else.