When it comes to financing the construction of a new home, you have two options.

1. Let a builder finance construction.

Common with larger building companies. The builder may ask you to put down a deposit while the company carries the cost of the construction. You get to choose floor plans, paint colors, fixtures and so on.

When construction is complete, you will obtain a typical mortgage, as if you purchased an existing home. Construction costs are built into the purchase price.

2. You finance construction.

Typical with smaller building companies or individual builders. You may choose to the carry the construction loan yourself. This type of financing is usually offered only at your local or regional banks and credit unions.

Your lender will determine the value of your home during your loan application by ordering an appraisal on the building and design specs.

Construction loans are short-term loans, generally 12-18 months. Costs vary by lender, so do your homework.

The majority of lenders will finance up to 80 percent of the property’s value.

Once approved, your loan is a closed line of credit. You can withdraw from the account as certain construction stages are completed. For example, after you acquire the land, you will need to pay for dirt work, then the foundation, the framework and so on.

Your lender will likely prepare a payment plan – a draw schedule – to guide the disbursement of funds through each stage. Periodically, the bank will send someone to check on the progress and verify draw schedule and budget.

Plan before you build.

Cost overruns

There will always be cost overruns or change orders. You may decide to add a larger patio or extra lighting. These items seem small individually, but they add up quickly. When planning your budget, conservatively allow for a 10 percent overage.

Variable monthly payments

Construction loans are short-term loans with adjustable interest rates. Think of it like a credit card payment. You pay the interest each month on the amount you borrowed. Prepare for payment fluctuation.

Permanent financing

Make sure you are qualified for permanent financing before taking out a construction loan. Some lenders may do construction loans but not permanent mortgages. Others do both.

Get pre-qualified for your permanent mortgage before you build.

Make certain you are pre-qualified for long-term financing before you build to avoid a potential financing nightmare when your new home construction is complete.

Talk to a lender to explore your options. Lenders at RCB Bank are happy to help answer questions even if you are not a customer. Give us a call or visit our online Mortgage Center.

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Opinions expressed above are the personal opinions of RCB Bank personnel and meant for generic illustration purposes only. For specific questions regarding your personal lending needs, please call RCB Bank at 855-BANK-RCB, RCB Bank is an Equal Housing Lender and member FDIC. RCB Bank NMLS #798151.

It should be no surprise that as a homeowner you are responsible for expenses beyond your mortgage payment, such as property taxes, homeowner insurance and mortgage insurance, to name a few.

Benefit #1: Escrow is a personal payment manager

An escrow account is a service provided by your lender to help you manage and budget home-related costs. A benefit of an escrow is you make one monthly payment that includes your mortgage principle and interest, plus a percentage of your insurance and tax expenses. Your lender takes care of paying the various bills due throughout the year.

Most lenders require escrow accounts on mortgages greater than 80 percent loan-to-value and are set up at closing.

Benefit #2: Escrow lets you spread out annual costs over time.

Another benefit of an escrow is you don’t have to stress to come up with large lump sum payments.

How escrow works

Your lender adds up your additional home-related costs outside your mortgage payment – taxes, homeowners insurance, mortgage insurance, flood insurance, etc. – They divide the total cost of these payments by 12 (months) and add it to your monthly mortgage payment.

Generally, a cushion of 1/6 of the total escrow charges is collected at loan closing to account for any unexpected increase in premiums when it’s time for the lender to make the yearly payment.

Your escrow account builds with each monthly payment. Funds are withdrawn from your escrow to pay for bills as they are due.

Can your escrow payment change over time? 

Yes, if there are changes in insurance costs and taxes, your escrow payment will also change.

Annually, your lender will review your escrow. The review looks at updated taxes and insurance costs to ensure the amount paid into the account is enough to cover costs. If costs have decreased, due to a change in insurance for example, there may be an overage and you would be issued a refund. If costs have increased, you will be required to make up the shortfall.

There are usually two ways to cover a shortfall.

1. Pay the shortfall in one lump sum.

Your full payment covers the past payments and brings your account to balance. An increase in monthly payments is necessary to cover the increased costs for future payments.

2. Divide and pay the amount over the next 12 payments.

Paying back your shortage over time will increase your monthly payment more than paying a lump sum because you are paying the shortage plus the increase in costs over the next year.

It’s important to understand, if insurance costs and taxes increase, your monthly payment will also increase going forward.

Get$Fit Tip: Shop around for insurance.

If you want to keep your monthly payment as close as possible to what you pay now, an annual check on your homeowner policy or other insurance plans may help. It is your responsibility to review your policy and shop around for the best deal, not your lender.

Make sure your policy is in line with current market rates and has not increased more than a few percentages, which is typical for some insurance companies. It’s always a good idea to comparison shop and request quotes. If you find a better deal, contact your lender to update your escrow account information.

Opinions expressed above are the personal opinions of RCB Bank personnel and meant for generic illustration purposes only. For specific questions regarding your personal lending needs, please call RCB Bank at 855-BANK-RCB. RCB Bank is an Equal Housing Lender and Member FDIC. RCB Bank NMLS #798151.

You found your dream home, made an offer and it was accepted. You’re pre-approved for a loan and feeling good. Your mind is now focused on moving. Hold on. A pre-approval is not a loan guarantee. To ensure a smooth mortgage process, avoid these four things during closing.

DO NOT take on new debt.

I realize with a new home comes the desire to purchase new furniture, appliances and sometimes even a shiny new car for the garage. Some stores offer no-money down and zero percent interest credit. It’s tempting to start purchasing.

Taking on new debt may raise your debt ratio (the relationship of income to debt). Banks and mortgage companies weigh this number heavily to determine your credit worthiness. Raising it could cause heartache at the end of your transaction. Loan officers run another credit check a few days before closing to verify no new debt has been obtained.

DO NOT Change Jobs.

The stability of your job and income are essential to your loan approval. Your capability of repayment is ultimately what the lender needs to see. Changing jobs during the purchase process could complicate things. For example, if switching from a W-2 salaried status to a contractor or full commission job would most likely disqualify you (that income typically needs two years of income for calculation). A bank typically needs to see 30 days on the job, at least one pay stub and time to verify employment. Verification of income is sent to the employer to make sure the income matches the paystub and that you are still employed, as well as a verbal verification a day or so before closing.

DO NOT stop paying your bills.

A new home purchase can become expensive when you are out closing costs that aren’t part of your typical monthly obligations. You have additional costs like movers. Even if money gets tight, pay your bills. Remember, loan officers will re-pull credit at the end of the transaction.

DO NOT pack up important papers.

You’re stoked about moving. Maybe you’ve already started packing. Make sure you don’t pack up tax documents, bank statements, paystubs or any other important documents that might be requested by your loan officer. The quicker you can respond to the processing requests of your loan, the quicker it will be approved. Delaying the response can delay closing.

Buying a home is exciting, but until you sign the papers at closing, your mortgage isn’t final. Loan officers issue a pre-qualification based on the documentation you provide. The final approval is issued on documents retrieved between signing the contract and loan closing. The final underwriting decision is made on a final credit review, tax transcripts, verification of employment and verification of deposit, NOT the initial credit, tax returns, paystubs and bank statements.

Loan officers are here to make this process as smooth and as simple as possible. Be open with your loan officer and make sure they completely understand your situation and that one of the above doesn’t become a gotcha moment.

Lenders at RCB Bank are happy to help answer questions even if you are not a customer. Give us a call or visit our online Mortgage Center.

Opinions expressed above are the personal opinions of the author and meant for generic illustration purposes only.  RCB Bank is an Equal Housing Lender and member FDIC. RCB Bank NMLS #798151.

Lending officers have their own language. We try not to use unfamiliar jargon when working with customers, but “talking mortgage” is second nature to us. Let me clarify some lingo my customers have called me out on.

1003

Your loan application. Pronounced ten-o-three. This is a uniform document all lenders use as their mortgage application.

LTV

Loan-to-value. This is a ratio of what you owe on your home versus what it is worth. In a home purchase transaction, this is also your loan balance versus your purchase price. The industry uses the lower ratio — appraised or purchase price — as the value of the home. Therefore, your purchase LTV may be higher than your actual LTV if your appraisal comes in higher than your purchase price.

CLTV

Combined loan-to-value. This is like your LTV, but includes the overall loan amount versus the overall value when combining a first and second mortgage.

DTI

Debt-to-income ratio. Also known as back-end ratio. A percentage of a consumer’s monthly gross income that goes toward paying debts.

Front-end ratio

Mortgage-to-income ratio. Indicates which portion of an individual’s income is used to make mortgage payments. It is computed by dividing your projected monthly mortgage payment by your monthly gross income. Front-end and back-end ratios are used by lenders to determine how much you can afford to borrow.

PMI

Private mortgage insurance. Commonly referred to as MI or mortgage insurance.  This is required on loans for which the buyer makes less than a 20 percent down payment or has less than 20 percent equity on a refinance. This insurance policy protects the lender in case the borrower ends up in foreclosure.

CD

Closing disclosure. A required disclosure given to all borrowers on mortgage loans three days prior to closing. This is a five-page document that details loan terms, payments, fees and other costs.

LE

Loan estimate. This document mirrors the closing disclosure, but is issued at the beginning of the loan application. Since the two documents look alike, it is easy to compare fees, costs and changes from start to finish.

Hazard Insurance

Homeowners insurance.

When it is time to buy or refinance a home, talk to a local lender first. The more you know about the mortgage process, available loan options and your individual qualifications, the more satisfying your homebuying experience is.

Lenders at RCB Bank are happy to help answer questions even if you are not a customer. Give us a call or visit our online Mortgage Center.

Opinions expressed above are the personal opinions of RCB Bank personnel and meant for generic illustration purposes only.  For specific questions regarding your personal lending needs, please call RCB Bank at 855-BANK-RCB, RCB Bank is an Equal Housing Lender and member FDIC. RCB Bank NMLS #798151.

Appraisals are a necessary part of the homebuying process, and for years, they were required to obtain mortgage financing on all new purchases or refinances.

Now, in some cases, the Federal National Mortgage Association, known as Fannie Mae, may waive an appraisal for eligible transactions.

Not all homes qualify.

In fact, Fannie Mae states that the majority of transactions will not receive a Property Inspection Waiver (PIW), meaning an appraisal is required to establish the market value.

Minimum standards for a PIW include one unit properties at or below 80-percent loan-to-value for principal residences and second homes.
Fannie Mae uses a database of more than 26 million appraisal reports as well as a proprietary analytics system to determine if the current market value of a property is acceptable or should be confirmed. For example, properties located in disaster-impacted areas will require new appraisals.

If your property receives the inspection waiver, you still have a choice to order your own appraisal.

Appraisals are important.

An appraisal verifies the value of the property you are purchasing. It helps you and your lender ensure you are not overpaying based on current market conditions.

A PIW, in my opinion, will best serve refinances. There are limitations for refinances too. Not all will qualify.

Do your homework.

A PIW may shorten your mortgage process by eliminating the need to schedule an appraisal, which will lead to a reduction in loan origination costs.

It’s important to be informed and get all the facts regarding your mortgage financing options.

I can help answer your questions, even if you are not an RCB Bank customer.

Opinions expressed above are the personal opinions of the author and meant for generic illustration purposes only. For specific questions regarding your personal lending needs, please call RCB Bank at 855-BANK-RCB, RCB Bank is an Equal Housing Lender and Member FDIC. RCB Bank NMLS #798151.

Source: Fannie Mae Property Inspection Waiver Fact Sheet

You’ve likely heard about the new tax plan and the changes coming to our tax code. I am not a certified public accountant (CPA) and cannot speak to how this may directly affect you individually, but I can share how the changes may affect your mortgage tax deduction.

One benefit of home ownership is being able to deduct your property taxes and mortgage interest on your income taxes.

For example, let us say you buy a home for $275,000 and the taxable value of the home is 1.25 percent of the sales price. On a mortgage at 80 percent loan-to-value accruing interest at 4 percent, you can expect to pay around $8,700 in interest and $3,400 in taxes, a total of $12,100, the first year. This amount will decrease each year as you pay down your principal.

Under the current tax code, the standard deduction is $6,350 for single filers and $12,700 for married filing jointly. If you had no other deductions, it would benefit you to itemize if you were single but not if you were married filing jointly.

The proposed tax plan will increase the standard deduction for single filers to $12,500 and married filing jointly to $24,000.

Using our example, the $12,100 mortgage deduction falls below the standard deduction for both single and married filing jointly.

Owning a home is an American dream for many people, and there are benefits to home ownership other than a tax break. Before you decide to purchase, be sure to look at the full picture of ownership.

With many current deductions and potential phase-outs of those deductions if the new tax proposal passes, it’s important to do your homework. Talk with your CPA and ask them to show you a future tax plan based on the proposed law.

When you decide to buy or refinance, first talk to a local lender. The more knowledge you have about the mortgage process, available loan options and your individual qualifications, the more satisfying your home buying experience will be.

Lenders at RCB Bank are happy to help answer questions even if you are not a customer. Give us a call or visit our online Mortgage Center.

Opinions expressed above are the personal opinions of RCB Bank personnel and meant for generic illustration purposes only.  For specific questions regarding your personal lending needs, please call RCB Bank at 855-BANK-RCB, RCB Bank is an Equal Housing Lender and member FDIC. RCB Bank NMLS #798151.

Sources: taxpolicycenter.org and irs.gov

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