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Understanding Alternate Costs When Applying for a Home Construction Loan

Home Construction Loan Requirements for San Diego County

Hey, everyone. Today I want to review construction loans again. I want to share with you why it’s really important to include all project costs into the lender package when building a custom home, an ADU, or maybe even applying for a renovation loan. When the bank receives and begins to process your package they order an appraisal and determine the largest amount of loan that they can provide based upon the value of the property.

Alternate Costs to the Specification Package for Loan Financing

If you leave out wanted options or finishes, the loan will not finance those items. A recent customer experienced some difficulties with the alternates. They were getting ready to build a home for which we provided a 60-page specification package. That specification package describes all the details of what goes into the home and accompanies the building agreement as an addendum. This specification book included some alternates. The alternates related to solar, cabinet changes, and a couple other things. The amount of money was over $10,000 in additional cost to the build price point.

Why You Want to Include Alternate Costs in the Specifications Package

The lender explained that the alternates will not be included in the loan amount. They only accepted the contract amount for the loan value at a set amount. Had the bank approved an 80% loan to value to lend based on the property and/or the appraisal, the customers would still have to come up with an additional $10,000 for the alternates on top of whatever full loan value that they requested. If the owners included the alternates in the initial lender package, so that it’s part of the total building agreement, then they must only pay $2,000 of the $10,000 related to those alternate costs. In this case, only 20% down of that full $10,000 required amount while the other $8,000 will be provided in the loan amount from the bank. 

Taking advantage of this ability means that the alternates must be written in with the initial lender package so that the bank funds the money. The soon to be ordered appraisal will reflect the included cost of the alternates. One drawback may cause the alternates to increase the house price beyond your loan capabilities, which may lower your loan amount. Keep that in mind in case you need to reduce the overall loan that you apply for. Make sure that you remember to account for all alternates in case the value for the lending will not cover the actual building costs, which is the amount of money that the bank needs to give you.

Additional Home Building Resources for San Diego County

All right, I hope that helps. If you’d like more information on building a custom home or buying land, then visit our website at tfgonline.com. Thanks for your time today. Have a great rest of your day.

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