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The Construction Loan Process - Understanding Appraisals



Meeting with a lender is the best first step to understanding your specific financing needs.

If you're looking to finance a new home build, you're going to need to have your home appraised at least once, probably twice. This post is meant to help you understand the appraisal process in the context of new home construction loans, and hopefully answer any questions you have about the "whys" and "hows" of appraisals. Keep reading, or click to jump to a section below!



Still have questions after reading? Feel free to Contact Us for more information!


WHAT IS AN APPRAISAL, AND WHY IS IT NEEDED?

An appraisal is an unbiased professional opinion of a home's value. Appraisals are required by lenders any time a mortgage is involved in buying, selling, or building on property. For new home construction, or anyone buying a home, a lender will not loan more money than they believe the property is worth.


Mortgage lenders are willing to loan money to borrowers under the condition that they can recoup their investment if a borrower needs to sell their house, or if the borrower defaults on their loan. This means the property must be worth at least as much as the mortgage. Lenders use appraisals to determine whether the property is worth the amount being requested by the borrower.


If you plan to finance the construction of your house and have a mortgage once building is complete, your lender will require an appraisal to know whether it is financially sound to finance your project.


WHEN IS AN APPRAISAL ORDERED IN THE LOAN PROCESS?

Initial Appraisal

An initial appraisal is required for the construction loan to be funded. Your builder will send plans and other specifications, along with construction budgets, to your financial institution. An independent appraiser will review the plans and specs, compare them against similar new homes in the area, and estimate what the value of the property will be once the home is built.


If you are doing a one-time close, the initial appraisal is all you need! (Read more about one-time closings here).


Final Appraisal

If you’re doing a traditional 2-time close, your lender will order a final appraisal once the house is done to confirm that the finished product is worth as much (or more) as the value of your mortgage.


WHAT IS INCLUDED IN APPRAISALS?

The appraiser takes all parts of the property into account. This includes:

  • The value of the land

  • The value of the house itself

  • Any other improvements to the land that will be in place by the time construction is complete (shop, pool, well, driveways, fences, etc.)

Even if you already own your land, the appraisal will include the land’s value – this is a huge plus for borrowers, as your land can count toward equity in your project.


HOW LONG DOES AN APPRAISAL TAKE?

It takes about 30-45 days from the submission of the appraisal documents to the closing of the construction (interim) loan. When you work with BAP, you can use that time to finish detailing your home and prepare for construction.

 

WHAT IF MY APPRAISAL COMES IN HIGHER / LOWER THAN THE BUILD COST?

If the bank determines the total value (land + house + improvements) is more than the amount you are requesting, you are in good shape and will be able to fund the entire project through your loan, minus any down payment / equity requirements.

If the bank determines the total value (land + house + improvements) is less than the amount you are requesting, you will need to make up the difference in cash before the lender releases any money to build, and you’ll still be required to provide any equity / down payment for the loan itself.


For 2-time closes, if the final appraisal is lower than the amount requested, you will have to make up the difference in cash in order to close on your mortgage.


Because appraisals are done independently, there’s no way to “negotiate” with an appraiser. However, you will know before building starts if your home is going to be within the initial appraisal, and you can move forward (or not) with that knowledge. For 2-time closes, there’s always a risk that the final appraisal will come in lower, but generally this is rare if there are no major changes / downgrades during construction.


HOW DOES BAP’S PRICING COMPARE TO APPRAISALS?

Many builders aim to price their homes as close to appraisal as possible. This allows them to maximize their profit but still allows the homeowner to finance the build. The higher the appraisal, the better it is for the builder.


At BAP, we always want to be within appraisal, for our customers’ sake. But in our case, the higher the appraisal, the better it is for you. We don’t adjust our pricing based on appraisal estimates – if you pay $450,000 to buy land and build your home, and it appraises at $500,000, you just gained $50,000 in equity going into your mortgage.


WHAT IS BAP’S TRACK RECORD ON PRICE VS. APPRAISAL?

Since Day 1, we have consistently come in under appraisal for our customers. The pandemic wreaked havoc on materials pricing and home values – even through that tumultuous period, our houses appraised higher than our customers’ prices. This happens for a few reasons:

  1. We emphasize close monitoring of prices, which helps us estimate accurately from the start of your project, and ensures we are getting the best prices available from our trusted partners.

  2. We prioritize strong communication with customers and subs so that details are understood and passed on to the right people during the build. This means our subs can work efficiently, and therefore more cost-effectively, keeping them happy, and saving you money.

  3. We build quality homes. Appraisers can look at the finished products and see the attention and care that goes into each room and detail.


Our most recent houses have come out anywhere from $10,000 to $100,000 under appraisal, with the average being about $30k under appraisal. That means, if the owner needed to sell their home tomorrow, they would turn a profit on their build.


HOW QUICKLY CAN I GET TO APPRAISAL?

To appraise your project, you’ll need to go through Design & Cost Discovery to design a floorplan and confirm your construction budgets. We offer several paths and timelines to design a floorplan and get it appraisal-ready:


  1. Fastest (~1 month): pick a floorplan from our site, and build it with no layout changes. If you really don't make changes, and there are no special considerations for your land / other project needs, 1 month will give us the time we need to do cost discovery, pull current construction budgets, and develop your site plan.

  2. Next-Fastest (~2-3 months): Have an initial meeting with us to see if we have any floorplans or draft layouts that are close to your vision, and modify to fit your needs. Depending on your availability and the changes required, we can usually have that done in 2 months. If you’re on the fence between 1 & 2, a month extra is worth it to make sure we get it right.

  3. Standard Pace (~2-6 months): If you don’t like any of our starting points, and want to design a home from scratch, we can do that too. This could take anywhere from 2-6 months and would start with a Design meeting and ideas, same as Option 2.

If you don’t have land yet, you’ll need to account for time to identify and secure land, as well. The purchase of land can be rolled into your construction loan if needed. Contact Us to get started, or use our online price tool to get a free estimate of your ideas.


ARE THERE LOCAL BANKS WITH WHOM I CAN DISCUSS MY SPECIFIC CIRCUMSTANCES?

YES! We have relationships with several lenders we regularly work with for construction loans. They can help walk you through the process from the financing side and answer any further questions. Contact us and we’ll put you in touch!




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