Tuesday, March 22, 2016

Money & Plans

I'm having so many firsts in this process. ALREADY! We haven't broken ground yet and I already feel like I've experienced a lifetime worth of financial learnings.

Spoiler alert - we're not independently wealthy. Also, this is our first home so we don't have much to speak of in the way of savings. So in order to renovate and build, we knew we'd have to borrow the money. While online research and subsequent horror story findings nearly deterred me, my love for our neighborhood kept me going.

We have a mortgage broker we love to the moon and back who saved our home when we lost funding in the middle of the escrow process when we bought the place. That's a LONG story for another day. She's a superhero and a dream to work with. Write this down for the next time you buy a house: Karin Hammer KHammer@mtgxps.com 503-330-3155 tell her I sent you. If you're even thinking about buying a house, call her. Seriously. There is no one better.

So, I called her to ask about construction loans. Because she's the most caring, honest person in the world - she shared that she doesn't have a product she loves for construction loans and mentioned Umpqua bank. Our architect and a neighbor had also recommended Umpqua unsolicited, so I gave them a call. Sure enough, after much research, they have BY FAR the best product for this type of loan. They're local which I love, so underwriting happens here in town by real people who get that we are also real people. We were partnered with Osha Roller who has been awesome to work with.

Let me back up - the order of things is important. Before we could get the loan, we needed building plans and a builder.

Here's my advice on this: If you're borrowing money to build, trust me, use an architect! Before you even know how much you can borrow, the bank sends an appraiser out. They appraise the current home value and the anticipated home value post-build based on the architect's plans. They send that same appraiser out when you're done to make sure you build what you planned to build with the same quality of materials etc. A builder alone may change his mind along the way. If there isn't a solid plan in place, you risk losing your loan/home/shirt.

I interviewed architects all last summer before finding Keith Abel. He got this look in his eyes when he came to see the house and I could just tell he was excited about it. Knowing what we're undertaking here, I really wanted this to be a passion project for whoever worked with us. He's done countless projects like ours and loves revamping older homes. We spent a couple of months together in the design phase getting it just right. The kitchen reno and the 700 sq/ft addition. Once the plans were complete, they were sent off to the engineer. The engineer takes the plans to an astonishing level of detail - from the size, weight, and circumference of the beams in the ceiling to mapping the electrical.

Meanwhile, we chose a builder. Eric and I really vacillated here. We "know a guy" who is fantastic and we felt that loyalty obligation to give him the work... but at the end of the day, we went another route. I think it's better not to work with friends on something so complex. Also, I felt that the relationship between architect and builder was far more important than the relationship between us and the builder. So, we chose a builder who has done 2-3 builds per year with our architect for over 20 years. Tried and true.

Now back to the money.

So, when we bought the house, we had an FHA loan. People feel strongly in support of and against this type of loan. For me, I wanted FHA because they inspect a home and an agreement a million different ways. As a first-time buyer, I was painfully aware that there were a lot of things I didn't know. I felt the the FHA process kept me from making bad decisions. If I could go back in time, I'd do the same thing.

With that said, with an FHA loan you have to carry mortgage insurance for the life of the loan. In a conventional loan, you only have to carry it until you pay your loan down 20%. If you owe 80% or less to value, you get to drop it. For us, that mortgage insurance was a couple hundred dollars a month, so it was significant. With Umpqua, we were able to refinance the house into a conventional loan and take out a construction loan in addition. Based on our post-build appraisal, this allows us to never pay mortgage insurance on this loan (because the ending value will be worth more than 20% above what we'll owe including the money to build) and we can keep it all in one process instead of refinancing with one bank and borrowing construction money from another. It's a win/win.

It's complicated. We were in "escrow" for sixty days. It involved appraisals - and us crossing our fingers and praying our design plans equated to the end value we needed to not pay mortgage insurance. It involved the builder breaking down the plans into a line itemized budget estimate to make sure we can build all that we've designed for the amount we're approved to borrow. There have been so many moving parts.

Now that the loan is closed, we can request draws. To get the money, we have to submit several different forms stating what we're using it for - and then all parties must sign. So me, builder, plus whoever he contracts for said work - all around the kitchen table each time we request money. We had a conference call yesterday to learn how to do this. I feel like I need to go back to school and major in finance to not screw this up.

Luckily, the bank and the builder have been very patient with me so far. Again, I cannot recommend Umpqua bank enough. I love them so much I have now moved all my checking/savings/line of credit to them. If you're in the Northwest, check them out.

I keep telling myself it will all be worth it... it will all be worth it... it will all be worth it... and in the end, we'll have the same amount of equity in the house as we have now. That's pretty cool. So, it's a good deal no matter how we slice it. It's just a little scary. There are so many factors. So many details that need to pan out in order to achieve the end result within the budget. Prayers and good vibes appreciated.

We'll go from a 1291 square foot 3 bed (but really 2, because one has no closet)/ 2 bath to a 2000 sq/ft 4 (real) bedroom/3 bath. I'm attaching the drawings before and after. I'll tell you more about it in future posts.

Next, we break ground!


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