Financing Your Home Building Dream: Borrowing Against Assets

Home building usually requires financing. And there are many options to consider when you’re planning to finance and build a home. If you have been reading my articles on financing the building or remodeling of your project, you’re aware of many of the options. Using the equity you have in other personal assets can be the easiest and sometimes the least expensive way to get money to build.

If you’re in a position to fund the building of your new home without needing to go through the pain and anguish of arranging for a construction loan, you’re in great shape! There are two good ways to do this. One way is to own other real property that is not encumbered with a loan. It could be the home you’re living in now. If its equity or value exceeds the cost of the home you want to build, then you’re in business. Although it’s rare, there are some states or other authorities that may limit what you can do with your line of credit loan so you should check these laws.

Another excellent option would be to use your investment portfolio as collateral. I’ve had clients who have had substantial investment accounts which included stocks, bonds, mutual funds, real estate funds, etc. and in many cases you can borrow against these. Always check with your investment manager before doing this. This article is not making recommendations, but pointing out options for you to consider. What is successful for others may not work for you.

Construction loans are complicated beasts. And they are not cheap to acquire either. So using one of these two strategies instead would make life a lot easier for you. The time and money you save can be used for better purposes, put directly into your building process. You might save as much as 2 to 4 months! The following outline will give you a good idea of the advantages:

-- There is little or no qualifying for this money.
-- The construction project does not have to meet any standards to access this money as it is not even considered when arranging for this money.
-- It is inexpensive to set up these types of loans.
-- The paperwork to put these loans in place is minimal compared to construction loans.
-- Once in place, access to your money is a simple process.
-- You maintain control over the money and its disbursement.
-- There is no down payment required as there is no money borrowed directly against the project.
-- No appraisal is required for the same reason. However, an appraisal of the land, as well as the ultimate finished product, is advisable.
-- There is no cost to manage the withdrawals of funds.

SOME CAUTIONS

-- You’ll need to be sure the value of your assets is substantially greater than the funds needed for your construction project or you may need to add additional money to the project.
-- The money borrowed against investment assets can jeopardize any assets that fluctuate in value. It is best to use stable investments as collateral.
-- Often the money obtained this way should be used only for a short term. Fortunately, this is normally the case with construction loans.
-- Depending upon how you go about building, the builder may want the funds placed with a construction money management escrow fund to ensure that the funds are available when needed (this is sometimes called a “builders control” fund.)
-- Funds taken this way will incur interest and may also require monthly payments.

If these options work for you, and your advisors agree, it’s a great way to finance the building of your new home. Any time you can reduce costs, time, hassles and confusion you’ll be better off. This money is only needed for a short time as once the home is built, you’ll be paying back these asset backed loans with a new mortgage.

One final thought. Even though there will be no construction lender demanding it, all the other normal pre-construction steps should be taken. You’ll need to work with builders, know building costs, evaluate time frames, get your appraisals, and line up construction management, etc. Also, be sure to pre-determine the amount of mortgage you can qualify for so it’s not an issue when it comes time to pay back what you borrowed.