Building a home from scratch

Love: A custom-built home answers the adage that people buy the house they hate least. These homes are loved.

August 15, 1999|By Charles Belfoure | Charles Belfoure,SPECIAL TO THE SUN

Katie DeBlasis gets a special feeling as she drives down the street to her home.

"When I pull into my driveway at the end of the day, I say to myself that's one handsome house, there's no other like it," DeBlasis said of her custom-built home in Howard County.

Her home isn't one of the cookie-cutter builder varieties. Rather, it is a custom-built.

An adage in real estate is that Americans buy the house they hate the least, but there is an alternative. About 10 percent to 15 percent of homebuyers today decide to build a home from scratch, which means construction financing must be arranged.

One of the most common methods is applying for a construction-permanent loan where the lending institution makes an initial loan that is solely used to pay for construction of the house. The money is disbursed to the homeowner's builder when specific stages of construction are reached.

After the house is built, the construction loan is converted into a permanent mortgage usually on the same terms as a 30-year, fixed-rate conventional mortgage.

During construction, the owner is required to pay only the interest on the loan. In some cases, the interest rate for construction loans can be higher than for mortgages. A survey of one institution's rates recently showed an 8 percent rate with 1.125 points for a nine-month construction loan, compared with 7.75 percent and no points for a 30-year, fixed-mortgage. Depending on the lender, the interest rate on the construction loan can be fixed or it can fluctuate.

But first things first.

Before finding a lender, the prospective buyer must learn what the house will cost to build. One of the first steps is deciding on a design, which for most people means searching though house plan magazines, visiting model homes and making lists of desired features.

"We visited a lot of model homes, but there was always one or two things we didn't like," said Brian Ahearne, who has just started construction on his new home in the Green Spring Valley section of Baltimore County.

DeBlasis recalled, "There were special things we wanted, like a laundry chute and a separate garden room for my husband's plants."

Put down on paper

The design has to be put down on paper for a builder to price the construction. This is key because the lender also will require a set of construction drawings and specifications on which an appraisal will be made to confirm the value of the project.

An owner can contact a builder who may have a draftsman or do as DeBlasis and Ahearne did, work with an architect to prepare the drawings.

After doing the research, DeBlasis and her husband sat down with Jeff Henneman of Henneman & Barton Architects in Columbia to work out the design. "After five incarnations, we had our house," DeBlasis said.

"Using an architect is well worth it," advised Larry Williams, executive vice president of Harbor Federal Savings Bank. Many architects are associated with builders and their fees usually range from 3 percent to 5 percent of the construction cost.

"Clients should come in with a realistic view of what they need and can afford," said Henneman. "But if you're going to go through with this exercise, you should end up with a design that makes the house special, [and] not wind up with an ordinary builder's house."

When the plans are completed, the owner can give the drawings to a builder they already have an association with, as Ahearne did with Regional Homes. Or the owner can put the project up for bids to a variety of builders. In the eyes of the lender, the latter course is preferable.

When the price comes in, it's usually many times higher than the owner expected, so it's literally back to the drawing board to scale down the house. The successful contractor -- or architect -- will work with the owner to bring the house under budget.

The owner can often be pre-approved for a loan amount by a lender and knows exactly what price he must work with. Once the changes are made on the drawings, the set is ready to go to the lender, along with a signed contract with the builder.

"The lender will then appraise the value of the proposed improvements and the property on which the house will be built," said Tom Champion, sales manager of Norwest Mortgage in Lutherville.

The appraiser also looks at the value of homes in the area to determine whether the project is comparable in cost and quality.

Besides the drawings, the lot is the other major factor in obtaining financing.

"Most customers have already purchased the land or have identified a lot they want when they come in for financing," said Kevin J. Michno, senior vice president in charge of residential lending with Mercantile Mortgage Corp.

In some cases they've already obtained separate financing for the lot or they include the lot purchase in the construction-permanent loan, he added. Some customers own a parcel free and clear.

No balance

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