Ways to Finance Alternative Homes
Mark Moore graduated from Texas A&M University with a major in Agri-Business and minor in Economics. He has 25 years of banking and lending experience in all aspects, including home mortgages. He has done lending in Texas, New Mexico and Colorado and is currently Senior Vice President of Collegiate Peaks Bank in Salida, Colorado. Collegiate Peaks Bank is the largest home construction lender in the Upper Arkansas River Valley, where they try to make it easy for the borrower from construction to permanent. They place permanent mortgage financing with Affliliated Financial Group and Skyline Financial Group. They are the only bank in that region that will do financing on alternative housing. They currently have four offices, two in Chaffee County and two in the Denver area.
Q: I live in Minnesota and we are trying to get a loan on an earth home. We have been turned down by hundreds of lenders because there are no comparables in the area. I was wondering if you knew of any lenders who would lend to us in Minnesota unconventionally?
A: (Gary Reed) Each alternative home building situation is unique and the devil is in the details of the appraisal. Knowing what the lender wants and how to format it is the key to getting the appraisal accepted. Comparable properties is always an issue with lenders who usually require they be within a very narrow radius from the subject property. Over the past 5 years we have been fortunate to assemble a group of lenders who understand these types properties and are willing to give us considerable latitude on the distance to the comparable properties. Alternative homes represent over 95% of our business and we do them in all 50 states. If you would like to discuss your specific needs and qualifications with me please contact me.
Q: We are in the process of building a strawbale/passive solar home in northern VT. My husband and I have run into a problem with the loan process. We were given a very low assessment of the land my husband has and the loan amount will not cover the cost of the build. We are now seeking a way to finance our home. We are both counselors and we live in a depressed area, and make a lower income for our level of education and skills. We have plans for our lovely green home, have cleared the land, and have plans for the septic system. Any info you could give us would be wonderful!
A: (Gary Reed) There are lenders available that will provide you with 100% financing for the construction portion of your strawbale home project. They finance the land, materials, labor, permits, fees and closing costs. There are others who will loan you 80% of the appraised value or 90% of the construction cost. Your first step is to have a set of plans, specifications, and a cost break down or budget. Once those are in place you will be ready to submit a formal application. When your construction is complete we will then roll your construction costs into a permanent loan, which is actually a refinance, so you will have virtually no out of pocket costs.
C (John Willis): I understand the sentiment that the financial industry needs to be enlightened. Its a weird business; a complex maze more complicated and cryptic than most want to know about. Regardless of the extent a lender is enlightened about the value of alternative homes, their problem is that most mortgages are sold in packages on a secondary market. The borrowers and properties must be largely like all others in a given package of loans. If one is different they cant sell it. If they cant sell it, they cant stay liquid enough to finance new properties and rates go up.
Theres another kind of lender called a portfolio lender. These lenders never sell their loans, so theyre not accountable to market pressures or rules of a secondary market. Its totally to their discretion to say yes or no. Credit Unions are one type of portfolio lender. There are others.
What I would like to see is a tax credit for investors on a secondary market who purchase mortgages written against alternatively constructed homes. This would create a larger, more liquid market and make accessibility of these structures much greater.
One very good way to finance an alternative structure is to draw an equity line of credit from another property. Given, you have to have another property with significant equity to do this. But its cheaper than borrowing with credit cards (not withstanding the shell games), and if its a primary residence, the interest is tax deductible.
I dont agree with the idea that its always preferable to have a home thats paid for. Ive done plenty of loans for wealthy people who could have paid cash, because it often makes financial sense. When rates are low, the money you put into your house, could be used for other investments. When you can borrower money for 4.5%, you have to ask what your opportunity cost is. If you put that money in a retirement fund, historically youd do far better to borrow cheap money and invest your cash at a higher return. Yes, Im aware of the macabre origin of the word mortgage. But its not the death of the borrower its referring to; its the death of the loanthe time in which it is paid in full ;-)
Q: I am building an earth-sheltered house in Rockaway, New Jersey, of a style that is, I must admit, much more expensive than the sensible and affordable methods you advocate. The house is about 35% of the way to move-in, and further construction is delayed by lack of financing. Because it is an unusual type of construction and I'm building it myself, I could not get construction financing. Do you know of any loans or grants available to people doing earth-friendly construction?
Q: I am looking into buying my first home, and I'm wondering what advice if any you can give me about earthship homes. I live in Fort Collins, Colorado and want to stay close to the area. Are there any financial lenders you know of in the area? I really have no clue where to start, so anything to help me get started in my quest would be greatly appreciated.
A (John Willis): Mortgage products for alternative construction are limited; for earthships, they may be even more limited. It's not that lenders don't appreciate low-impact building. There are many reasons the options are limited, but it's a long story.
Q: How do you finance these types of homes?
A (John Willis): It depends on the borrowers situation. Regardless of construction method, you can do a land loan up to 95% of the purchase price. Some construction methods can be financed with conventional construction financing. But if it's too out of the ordinary, it will probably require an equity line of credit from another home.
A (John Willis): The definition of 'green' is still very broad including the definition of a 'green' home. And your definition of average credit may not be accurate. Most people have more options than they think. As a general rule, you can finance 100% of a home with a 580 score, sometimes 560. The rate will be higher with those scores, but still respectable relative to historic averages. If your score is over 620, you have a lot of options. If it's over 680, you'll qualify for most programs. With a 720 you are golden.
The question is how green can you get with conventional financing at 100%. You can build ICF, Solar heating, passive solar, solar water heating, heat sink materials, and many others. You can acquire recycled lumber and timbers. There are a lot of options, but if you're thinking about an earthship, you're gonna need some cash. You can finance up to 95% of the land, but building costs will need to come from your pocket. These homes are generally built a piece at a time like a savings account of tires, and aluminum cans while the builders live in another structure on-site or another house. Or, they own another property and do a cash out refinance and use the proceeds to fund their ultra green house. You can start right where you are and get a whole lot greener.
Q: I am looking to build an environmentally safe home. I would like to use solar and wind for my source of heat and elect. I also would like to use straw bale, brick or some other form of material that would help the environment. I live in Minnesota, and at present am looking for land to build this home. Could you give me some tips on building this type of home in Minnesota, and how I can get financing, and builders in this area.
American Broker's Conduit will do it. They are not a retail bank. You will need to find a full service mortgage broker in your area who can broker to 'ABC' or another wholesale lender who will lend on this type of house. However, ABC only does permanent financing, not construction loans.
National construction lenders such as IndyMac don't tend to finance 'unusual' construction projects. So, you're better off checking with a local broker. You might also check with local credit unions or banks. You want to find a 'portfolio' lender. That means your construction lender is lending their own money and not selling their loan to an investor, nor are they bound by the criteria of that investor. Essentially, they have more latitude to fund whatever they want.
You'll have an easier time getting a construction only loan with a local lender if you show them a loan commitment for the permanent financing on the finished house. That way, the construction lender will know you can pay off the construction note upon completion.
Q: I've been surfing alternative/green/kit/owner-builder sites for years. Mostly people have to have cash to do these homes. I've begun to put my passion in my work and would like to share about BuildMax...they facilitate the owner-builder through both construction to completion and make possible a conventional 100% loan product that will finance both the land and the improvements on a conventional construction-to-perm one-time close. There is no down payment, no payments during the build, and one of our underwriters permits 2 draws per month. We supervise, by telephone, the entire construction process...we helped build 270 homes this past year. The fees are competitive and our rates comparable. We're giving the opportunity for real sweat equity and empowering home-builders/home-owners who might not otherwise be able to own homes. The website is www.buildmax.com.
A (John Willis): From what I can see on their website, it looks like a good program. On the upside, it looks like you can get into this program with little or no cash out of your pocket. Not sure, but it looks that way. Often, you might have to have 20k or so in closing costs and reserves to qualify.
I have no idea what they're like to work with. I've seen plenty of lenders who promise the world and turn out to be a nightmare. It happens and it can be very costly to borrowers.
I didn't see anything that said they could build anything 'green'.
And I'd want to give anyone who was considering this a strong warning about a.) making sure they know what they're getting into and whether they are ready for it, emotionally, financially, and otherwise. I'd also want them to make sure they have located permanent financing before they initiate the construction loan. Having a balloon payment come due on a construction loan, with no means of permanent financing is a great recipe for bankruptcy. Not being paranoid, just realistic. Building your own home can be very satisfying and very lucrative. But it's not for everyone and certainly not for every circumstance.
Q: My wife Connie and I are committed to constructing a monolithic dome (Italy, TX) that rates an R value of 69, power it off-the-grid with solar, employee composting toilets and retire with a small low impact footprint on about 40 acres in the hills above the Brazos River just northwest of Mineral Wells, TX. Once the dome is up we will take about 2 years to finish the inside ourselves to keep costs to a minimum.
Credit rating is excellent but no one we can find is ready to lend $120,000 to put up the dome shell, purchase the solar and install the geo-thermal wells and piping for radiant heating/cooling in the slab AND let me take approximately two additional years to finish the inside myself to save approximately $80,000 on how much I need to borrow.
This is not an over night decision Connie and I have made. We have a small cabin and test bedded these concepts in it. We understand the tasks, work, and commitment we must make to make this work. If we are lucky, when finished we will have a small nature preserve (about 40 acres) to retire to and hold nature walks and educational sessions for local schools and nature interest groups in a complex area of the Western Cross Timbers Region of North Central Texas.
There is, however, another kind of lender called a 'portfolio' lender. Portfolio lenders do not sell their loans. While most have a set of guidelines that they typically do not stray from, it is in fact their money and they have the ability to do with it what they want; especially, if they're a privately owned company-they don't have the same fiduciary responsibilities to their stockholders.
Credit Unions and some local banks are portfolio lenders. If I were going to approach such an institution, I would come prepared with a standard 1003 Loan application and all my financials, but also a proposal: You finance the project in exchange for our full cooperation in a PR campaign. Perhaps you could convince the lender that they will make enough money on the positive press, that any additional risk, real or perceived, on the project is well worth it?
An easier way, if you are in the position to do so, is to leverage other properties. Given, you can probably get a lot loan, up to 95% on the land itself. If you already own it, you may be able to take 90% of the land's cash value out, to help with construction. If you own other properties, you can take 100% of the value out.
If you're able to leverage other properties to build your retirement home just make very sure that you either have a.) no payments on your retirement home when you are done (excluding a lot loan), or b.) a commitment for permanent financing. If you do maintain a lot loan, make sure you understand the terms. Many if not most lot loans have fairly short terms. Very few amortize for a full thirty years because lenders assume they will be built on and refinanced with traditional mortgage financing.
My hope is that eventually, lender's will have programs specifically for this kind of project. My hope is that State or local governments would provide lenders a tax credit for financing low-impact homes. Until then, we just have to be creative.
Q: We are in the process of starting to rebuild our home that was destroyed by fire last summer. We have been informed by our insurance company that they will pay a maximum of $292,000 to rebuild our existing home. We have a 15 year mortgage at 4.65% and we are in year two of that mortgage. We do not want to jeopardize that mortgage, so we are not interested in refinancing. The home that we are planning to build will include 122 square foot addition, raised roof structure to accommodate the addition and the use of green, sustainable products where we can afford them. We will have a solar system installed for electrical. We are trying to figure out how to finance the additional costs over what the insurance will pay: approximately $150,000. What kinds of loans are available and what would you suggest we go for?
Your financing options depends on the value of the house. Once it is rebuilt (not including the addition you're planning) will you have $150,000 or more in equity? If so, you could do your reconstruction first. Once that's complete, you could get an appraisal, showing the 150k plus in equity and get a 2 nd mortgage. I agree, you may not want to touch your very low 4.65% note.
I would recommend getting a fixed or 'closed in' second. If you got an equity line of credit, or HELOC, it's going to be adjustable. Most are based on the Prime Rate and I don't think that's going to go down anytime soon.
The reason you have to do this in two steps is that while your house is under construction you won't be able to borrow against it. So, it has to be repaired and finaled to be lendable again.
If you don't have the 150k in equity, you're pretty much stuck with a construction loan. The construction loan will allow you to base the Loan to Value on the finished house, including the addition. They use a 'subject to appraisal' which means they appraise the property subject to the completion of your addition.
Or, if you wanted to do the rebuild and addition all in one stage, you could do a one time close construction loan, but they would require paying off your low interest 15 year note. Before you decide against that option, get a quote on a closed in second for 150k. Then get a quote on a new 15yr note that includes your current balance and the cost of the addition. If the blended rate between your current mortgage and a new closed in second is higher than a new 15 year fixed, you're better off to just do the one time close construction loan. You might consider a 30 year fixed, if the payments just seem too high. You can always accelerate payments if your finances allow it.
Q: I am a loan officer and am seeking advise on locating a national lender who will finance alternative building styles. Do you have any suggestions ?
Q: I am wanting to buy a yurt that is fully permitted and with foundation post and beam into the land. It is in Hawaii but I am having trouble getting financed for this unique kind of home? Any referrals? I wanted a home loan for 30 yr term.
A: (Kelly) Interestingly, I just finished reading a marvelous new book (Yurts: Living in the Round) about yurts written by Becky Kemery (she also has a website: http://www.yurtinfo.org), where she discusses the problems of getting conventional financing on yurts. Because they are generally portable structures without a conventional foundation, banks are wary of loaning money on something that might walk away. She suggests approaching the loan officer with the term "non-conforming house" as opposed to yurt, and have lots of nice pictures to show how solid it appears.
Q: Can someone tell me if there are any grants or funding for a one bedroom straw house? I want to build one in the spring but cannot find any financing to do so.
A: (Gary Reed) It is very difficult to obtain financing on a one bedroom home since there are few sold comps of any type construction that the appraiser may use to determine the value of your proposed property. I do have lending sources available for post and beam infill straw bale homes. Credit and financial worth is a major factor. Construction loans for self build are 65% of the cost to build. If you own your property outright that may not be a factor. I would encourage you to consider at least a 2 bedroom 1 bath home if you require financing. The possibilities of success would be much greater.
Q: I have been reading up on earthbag building as well as other methods and I'm interested in the beginnings of a grassroots organization perhaps to help solve many of the issues of homelessness in the US and other places and wonder if this method could be easily adapted to not only provide many homeless people with places to live, but jobs to those willing to work. Have you any thoughts on this idea?
A: (Kelly) I agree that earthbag building has great potential to house the homeless and provide employment. Of course any building costs money, so there would need to be some funding to make this happen...and unfortunately this is not likely to come from the homeless themselves, although they might be able to help with the construction, much like what happens with Habitat for Humanity projects. Perhaps this would be a good model for doing something of this sort.
Q: I am wondering to what extent the various construction modalities mentioned on your site have been used in commercial construction, IE resorts? In the US? Mexico? Panama? Are there any sources of commercial financing that you might recommend?
A: (Gary Reed) It is necessary to confirm the availability and guidelines of each potential lending source each time a project presents itself. There are commercial sources and programs available for resort projects but most lenders are reluctant to consider financing of same in the current economic climate. You would need to have very strong support of how you would promote and attract clients upon completion and maintain an acceptable vacancy rate. The size of the project determines which lenders and programs would be a possible match for your project.
Q: We are a childless couple in our 60's and about to retire from the NE to the SW- New Mexico is our choice. Since we are not rich & have no need for a 3-4 bedroom home, but DO need a large lot, at least 3/4 acre, we are interested in building an affordable, SMALL energy- efficient home, like the ones designed by Laura & Alex Sanchez in their book, 'Adobe Houses for Today'. We are particularly interested in one of only 862 sq ft, plus a garage. How much trouble are we going to have getting financing for a house of this size in a decent development or lot close to standard power and water? Can you suggest any lenders we might talk to in the Silver City area of NM??
A: (Quentin Wilson) I don't know the Silver City scene but up here in the environs of Espanola loans on adobe homes are almost routine. I have dealt with two locally owned banks, The Valley National and the Community Bank. In both cases I start with the bank president in these small banks. One president of Valley bought an adobe home that I had built so during his tenure the bank was wide open to my ideas. Another president who likes adobe then went to the Community Bank and is still there. We even did business with the Bank of America in Espanola once.
Q: I need help in getting in contact with a broker that does construction to permanent loan for a second home in North Carolina. This home will be log and what we need the most is a lender who will take or give credit for the equity as cash for our down payment towards the loan. We have owned our land for 6 years and I can't find anyone who will allow us to use our land as a down. Any answer or guide you may have for us would be great, otherwise our dreams will come to end.
A: I would suggest that you seek a local, independent community bank in your area that does construction lending. Going through a broker or corporate bank can be a nightmare, especially on the construction part. Plus it will cost a lot more in fees due to the fact that they cant do anything themselves, such as inspections. They have to hire building inspectors or architects which can run into a lot of money. There are community banks all across the country that do this type of financing, plus you get the personal service dealing with someone local. All commercial banks will use earned equity toward the down payment on your loan. They may balk if it is unearned equity such as inflated appraisals but you don’t see much of that in today’s environment.
Q: My husband and I have fallen in love with an earth-berm home for sale up here in northern Wyoming, but we can't find conventional financing for it due to lack of comps. I was wondering if you could point us in the direction of a lender who is used to working with this sort of home.
A: I would suggest that you contact the local, independent community banks in that area. They are more likely to be able to do unconventional homes such as that rather than a large lender like Wells Fargo. Also, you might see if there is a mortgage company by the name of Affiliated Financial Group in that area. They are very helpful in doing that sort of lending.
Q: We are trying to build a "healthy house" in Tucson AZ using natural materials and no chemicals as much as possible. We are having trouble getting financing using "natural methods" of termite control instead of the chemicals. Do you know of anyone who would finance a construction loan on a home like this?
A: One option is to check with one of the local realtors and see if they know of a bank that would do what you are asking.
Q: My husband and I are trying to build a strawbale home and we are having trouble getting a construction loan. We don't own the land yet. Can we get a loan for both the lot and construction for a strawbale home? We live in Idaho, can you or do you know anyone who can help us get financed?
A: I would suggest that you contact one of your local, community banks in regard to getting your home financed. There is a company called First Mortgage Company in Colorado Springs that would look at doing your permanent financing. If you can get that arranged, then one of your local banks would probably do the construction loan for you. The larger banks do not care about doing anything on unconventional housing.
Q: We are trying to build an earth sheltered home here in Missouri. As you know from others no one wants to lend on these homes. Our home will be approx 2600 sq ft. There is a dome home down the road from us that has been there for years, and there are earth berm ones all around the area where we are going to build and still we are getting the run around. Can you help?
A: Unfortunately, Missouri is out of our lending area. The biggest thing that a bank runs into in doing a construction loan on a non-conventional home is obtaining permanent financing on it after the home is complete. Most commercial banks do not do in-house, long term mortgage financing. They have a mortgage company that they sell the loan to. One thing that you could do is to try and find a mortgage company that would look at doing your permanent financing. If a bank has a take out letter from a mortgage company, then they are more apt to do the construction loan. I don’t know where in Missouri you are but we have a branch of a mortgage company located in Rogers, AR. The name is First Mortgage Company and they are very easy to work with. You might look them up and see if they would be interested in doing the permanent.
Q: I am a single woman, living in Fairbanks, AK. I own my property and have a good job. I want to build a home using the Intrashelter Polar Domes. These are proven cold weather, energy efficient structures. Since the Polar Domes are not the usual type of homes I cannot find financing. Any help or direction?
A: Your best bet it is to try to find a local, independent lender, not one of the big banks that do cookie cutter loans. They are more apt to be flexible in their lending guidelines.
Q: Do you have a list, or know of someone I can contact, about a loan to build a dome home on my land in Arkansas?
A: I don’t have a list of banks in that area that might do unconventional lending. I can give you a name of a mortgage company that does permanent financing on homes such as that. You might contact them and see if they know of anyone who will do the construction end of it for you. I don’t know where in Arkansas that you are, but the following contact is in Rogers: Emily Mansch. First Mortgage Company, www.firstmortgageco.com
Q: My wife and I live in the eastern panhandle of West Virginia and we have decided that we want to build a strawbale home with a small organic farm on it. As we are 24 and 25 years of age we do not have a large sum of money to fork over for land and a home. Through my research I have discovered that no lender is willing to finance our project. We have also discovered that a local and privately owned bank may decide to fund our project with their own money if we can create an effective proposal. Is there any sort of funding that you may know about for the buying of land and the building of such a structure and growing an organic farm?
A: (Kelly) I suggest that you work hard to create an effective proposal for your local bank, as the national ones are not likely to fund your project...as you have found out. You might get some assistance from someone in your area who has succeeded in going this route with that particular bank.
Comment: I just spoke with a broker with Nova Home Loans in Scottsdale, AZ. He funded an Earthship! I asked if it was OK to pass his info on to you for posting and he said yes. Jim Tulin, Office: 480-614-6409, www.NovaHomeLoans.com
Q: We would like to buy an off grid home in Drake CO. It has solar, septic and cistern. 2.6 acres Selling price $117,000 Can you help with this?
A: We have some pretty good luck being able to get financing for homes that are off the grid, but they still have some requirements. We cannot do any that has no well. The cisterns wont work. Being solar powered is okay, but not the water.
Q: I have received approval from a credit union for a partial amount (165,000) of the loan requested and need funding for the remaining 70,000. I have a cash down payment of 33% ($110,000) and the property appraises much higher than the asking price of $345,000. I have a bankruptcy from 5 years ago on our personal home with the market failure in Reno NV 2009/2010 and we do not take a substantial income from our business as we have no expenses so the personal tax returns show small income which does not qualify us for the $235,000 we requested and the property is Off grid in Idaho. Do you have any suggestions or help for us?
A: You are going to have a tough time with several things. If the property doesn't’t have a well and you are relying on a Cistern, that will be a problem on the property side. On your side of it, until the bankruptcy is seven years old, most mortgage companies will not look at it, plus if your tax returns do not show adequate income to service the debt, it will not work.
Q: My husband and I are moving to Delta Junction, AK soon. I know there are other people living in yurts in the area around Fairbanks, so it is feasible. Our goal is to find a piece of land around 10k. We want to buy a yurt that costs around 15k and put it on the land. We plan to also buy a composting toilet, tankless water heating system and build a loft inside the yurt to sleep on. We intend to buy land that already has power access, because we heard that lenders are more likely to see that favorably for a build. I guess my main questions are: With an estimate of 50k to cover absolutely everything we need (land, yurt, amenities etc) would it be wise to buy the land first with as much cash as possible, and only finance the yurt + amenities? Or is it a better idea to finance the whole kit and caboodle? Which option would be easier and get us a lower interest rate? For 50k is it better to try and get a loan or get a personal line of credit? If the answer is "get a loan", should we try for a signature loan or a home loan? My husband is a veteran and we have an excellent credit score.
A: You are better off going ahead and buying the lot and paying it down as much as possible and then roll it into a construction loan to get your Yurt in place. I would look at getting a VA real estate loan on the $50k. A bank or mortgage company would be more apt to do an unconventional loan with a VA certificate.
Q: My husband and I are interested in purchasing a monolithic dome home in the hillcountry just north of Austin Texas. It is below our price range and we have wonderful credit as well as a stable income. However, the lenders we have spoken to say that it all comes down to comps in the area. Do you have any suggestions of how to solve this problem or any specific lenders you can refer us to who are more open to lending on this type of home?
A: Comps are a problem with unconventional homes. It depends on how stringent the lender is on having the comps close and how old the sales are. You will have better luck dealing with a local, small lender who understands the area and has flexibility in policies.
Q: I would like to install a compost toilet but I cannot find a bank to give me a construction loan with that kind of toilet even though they are legal in MA. Any advice?
A: (Kelly) Well, if you need the financing, then you might go ahead and install a flush toilet, and later after it is all signed off, install the compost toilet. It is either that or further searching for a bank willing to loan with the alternative system.
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