Dear It's Complicated: I Want to Build a Family Compound!
Angela Colley — It's Complicated
Dear Its Complicated: My family is interested in buying land specifically to create a multigenerational living situation with my parents (and perhaps also my grandma). Ideally, we would build two houses, a main house for us and a smaller house for my parents. Another option would be one house with a separate wing for my parents.
From a financial standpoint, what do we need to consider? My husband and I are anticipating putting down the majority of the upfront money. Since we live in an expensive part of the country, we’ll need to get a mortgage for the land and a construction loan for the house(s). How are mortgages different for land rather than houses?
Once everything is purchased, built, and sold (in terms of our current homes), should we get one mortgage with all parties on it, or is it advisable to have one party handle the mortgage and the other party handle other types of costs, like property taxes, maintenance, etc.?
And finally, how might we hold the title to the property?
What an amazing way to build something everyone in the family can enjoy.
First off, congrats on being an awesome family member. It is admirable that you and your husband are willing to take on the bulk of this financial challenge. As you know, this isn’t a typical home building situation, but you can pull it off. Let’s break your question down into three parts:
Getting the initial loan
First of all—not to scare you off, but—you should know that getting a loan for raw land can be a bit challenging. There aren’t as many options for this kind of financing as there are for a traditional mortgage, but that doesn’t mean you can’t still secure a good deal.
You’ll likely need to get a construction-to-permanent loan, which essentially bundles financing for the purchase of the lot, construction, and mortgage into one loan. It makes it easier on you too, since you won’t need to juggle securing multiple loans, building a house, and selling your current home all at once. Qualifying for a construction-to-permanent loan is fairly similar to qualifying for any mortgage. The lender will want to run your credit score and verify your income to show your ability to repay (same goes for anyone going on the mortgage with you).
However, these kind of loans differ in a couple of ways. For one, you’ll likely have to pay more upfront. While you could get a loan with a low down payment for a traditional mortgage, those options aren’t as available for building a home. “You're likely putting down 20 percent or more before doing this loan,” says Joshua Jarvis, CEO and founder of Jarvis Team Realty in Duluth, Georgia. Your approval amount will also work a bit differently. A traditional mortgage can base your loan amount on the appraisal value of an existing home, with new home construction, you won’t have that option. Instead, “essentially the lender asks an appraiser what he thinks the property will be worth after the construction is complete. The amount of the loan will be based on this number,” Jarvis says.
Finally, once you’ve got your loan in place, depending on the lender, you may not receive a lump sum upfront. “Different lenders have different policies, but most have some sort of ‘draw’ system where they release a certain amount of money to the contractor or buyer in stages as the home is finished,” Jarvis says.
Since you’re considering building multiple properties on a special loan type, Jarvis recommends looking for a smaller, local lender you can meet with to discuss your plans, or even asking your builder for a recommendation.
Bringing in the family
When it comes to adding family members to the mortgage, the biggest issue to remember is you’ll all be on the hook, which can be good or bad.
On the positive side, having multiple adults willing to go in on the loan can help with your loan approval. “Loans are more favorable the lower the credit risk. So, essentially the more people on a loan, the better for the bank, since more signers will be obligated to make the payments each month,” says Jarvis. And since you live in a more expensive area, having more family members on the mortgage could make it easier to qualify for what you need. “The combined incomes of multiple people can make a larger purchase possible, since you’ll need to reach set income limits to qualify for larger amounts of financing.”
On the potentially bad side, when more people sign together, more people are responsible for keeping up with the payments, and if something slips, everyone suffers. A missed or late payment would be a black mark on everyone’s credit report. While that probably won’t happen, it is something to consider.
When it comes to splitting bills, since you’re family, it may work best to consider income levels first. If mom and dad (or grandma) are living on a fixed income, paying half equally might be too much of a strain for them. Instead, you could base each person’s contribution on the 30 percent rule. In theory, no more than 30 percent of your income should go toward housing costs. Considering that, calculate 30 percent of everyone’s individual monthly income and either put that into a housing pool, or have each family member cover a bill that costs about the same.
Keeping the title
Once everything is built and ready to go, it’s probably in your best interest to keep the title in you and your husband’s name. “I definitely recommend going that route,” says Jarvis.
While it may be tricky to explain now, you’ll make things easier for yourself later on. “Should something happen to your parents, you won't have to worry about an estate of any kind, you'll just keep on owning the property,” says Jarvis. No one likes to imagine it, but tensions can run high once a family member passes on, too. Many families have lengthy fights over who owns property and possessions after a death. Putting the title in your name now avoids arguments later. “Family members won’t be able to make a claim if the title is already in your name,” Jarvis says.
There’s a lot to consider, but we wish you the best of luck!