Financing New Construction

Q: I own a house currently in Connecticut. It is a lakefront house with an estimated value of $900,000.
 

We currently owe $75,000 on it and another $60,000 on a home equity line of credit.

I am being relocated and we are looking to build a house. The new house will cost us $737,000. We have no credit card bills, and our credit is excellent. Our combined annual income is approximately $165,000 per year.

What is the best way I can keep my current residence, and perhaps rent it out, while also building this new house?

A: I guess my first question is how much money have you saved outside of your home equity? Are you planning on using money from your savings to pay for the new home or do you need to finance the construction?

If you need to finance the construction, you can obtain a construction loan on the new home or use the equity you have on your existing home to finance the construction project. But you still need to make sure you can afford the payments. That’s where your outside savings would come in.

You should sit down with a mortgage lender or mortgage broker to evaluate your financing options.

If you want to rent your existing home, the rental income from the home may assist you in obtaining financing for your new project. But you risk having a lender review your income and limit the amount you can borrow.

Overall, I’m not quite sure how you can afford to build a $740,000 new home with an income of $165,000. If you triple your gross income, you could afford a $500,000 mortgage. If you multiply your gross income by four, which is very aggressive, you're still only at $665,000.Your income simply isn't enough to carry the payments on a loan for the entire cost of the new home. Again, the missing information is how much money you have in savings to put down towards the construction of your new house.

If you receive enough income from the rental of your current home to increase your combined annual income substantially, that might help you qualify for a loan. Then you might be able to squeak by – if you get an interest-only loan.

The real question you have to ask yourself is how badly do you want to keep this lakefront property? Is it worth stretching yourself financially to the maximum? What happens if you lose this new job? What happens if you find you don’t like the area and want to move back? What happens if your house really costs $850,000 to build?

I don’t think you’re leaving yourself a lot of wiggle-room unless you have a lots of savings put aside for this project. But if this is the path you’ve selected, talk to a local mortgage broker about various options and what it would cost you each month, then talk to a local real estate agent about what kind of rent you could collect from you property.

Add up the numbers and then make a decision.

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