Step by step to construction financing - guide "wanted"

Hello everyone,

while searching for a thread that might somewhat show the guideline or the first steps to approach a construction financing, I had to read a lot from different threads so far and also noticed some contradictory information.

Primarily, it is about gaining the best possible position with banks and credit intermediaries by considering some points (the first impression / knowledge I see as quite important).
Planned approach as follows:

[*
Step 1 – Determination of what the property may cost (land + house including all costs)




[*]Step 2 – In consideration with step 1 / Calculation of loan amount monthly (what can I afford)




[*]Step 3 – Equity / What all is included, what the bank considers (other building savings contracts / target savings plans etc.) and how much should be held back (aside from equity for ancillary construction costs)




[*]Step 4 – Making first contacts with an architect or builder for planning the desired house.




[*]Step 5 – Obtain financing offer from a broker & or bank
[LIST]
[*]Question --> should an independent broker like e.g. Dr. Klein or Interhyp be contacted first here and afterwards the house bank or another regional bank? Do these advisors at Dr. Klein or Interhyp charge any fees?
[*]Question --> how does it behave in initial talks when the exact costs of individual specialist contractors are not yet known, but only a rough direction (pre-planning) exists and one has drawn their "own" limit of the construction sum (What can I afford).
[*]Question --> What must be presented for such initial offers? Pay slips (last e.g. 3 months) / tax assessment / tax return / proof of equity e.g. bank statements, building savings balance, savings books etc. / calculation of living space / floor plans / site plan / cadastral map / land register excerpt / land purchase contract / appraisal / building permit - construction plans (actually not yet available) / cost plan (how must it look) / proof of own contribution (how can this be presented)

[*
Step 5.1 – Consideration of the different offers as well as different approaches.
[LIST]
[*]Question --> What is your experience regarding splitting the loan into e.g. 2 or 3 components such as a small loan which is finished after 5 or 10 years, large loan with 20 years term and fixed interest rate as well as e.g. a KFW 153 (KFW standard 55 is aimed for) with 20/3/20.
[*]Note --> Due to current interest rates, combination products such as building savings contract / fund savings plan or life insurance are not an option.

[*]Step 5.2 – Especially the point of special repayments, which are also possible with the KFW loan, I consider quite important and should be focused on in my opinion (is considered).

[*]Step 6 – Compare and find the cheapest provider

[*]Step 7 – Take out insurances such as risk life / and disability insurance (the latter already in place).
[*]Step 8 – Obtain offers from the individual trades and specialist contractors
[*]Step 9 – Obtain final offer including all possible costs

I created the points based on my current "layman’s knowledge" and am not quite clear about the best possible constellation yet. Therefore, thanks in advance for your clarifications and comments on what can be improved or what you did differently back then.

Planned time frame as follows – End 2016 start pre-planning architect / builder, beginning 2017 first talks regarding construction financing, early-mid 2017 obtaining offers from individual trades / specialist contractors, end 2017 closing financing, early 2018 start construction. (Land already purchased with equity)

Regards Andreas

Good morning everyone,

I hope the long text above does not discourage you from responding (reading) here :)
I think anyone who has ever built something can share their experiences or processes and thus explain whether my assumptions / processes are wrong or right. (No hesitation)

Regards Andi

Good morning,

there is no optimal approach. Everyone deals with the topic individually. Instead of starting with the money, you can also start with the house. Here is my approach:

[*]Determine the costs of the desired property (land and house)

[*]Consultations with banks and brokers
[*]Adjust wishes, property, and financing to reality and bring them into harmony.

These first three steps are repeated until everything fits. You can nicely see from the discussions in the forum how the demands repeatedly exceed the available money. When everything fits:

[*]Detailed planning of all possible costs and additional expenses, risk assessment

[*]Obtain financing offers
[*]Understand (!!!) and calculate financing offers

[*]Sign
[*]

So much for the theory. For me, it will still take two years until I can seriously start building.

Step 3 - Equity / What all belongs to it, what does the bank consider (other building savings contracts / target savings plans etc.) and how much should be held back

Depends on the bank. Already owned land is also equity.

Do these advisors cost anything at Dr. Klein or Interhyp?

No, they earn from the closing commission.

Question --> What must be able to be presented with such initial offers? Payslips (last e.g. 3 months) / tax assessment / tax return / proof of equity e.g. bank statements, building savings balances, savings books etc. / calculation of living space / floor plans / site plan / cadastral map / land register excerpt / purchase contract for the land / appraisal / building permit - construction plans (actually not yet available) / cost plan (how should it look) / proof of personal contribution (how can this be presented)

You don't actually have to present anything at an offer first. The documents are necessary when it comes to the actual closing.

But you should already know what you want and how much you have available. An early conversation at your house bank is never wrong.

Question --> What is your experience regarding splitting the loan into e.g. 2 or 3 components like a small loan that is paid off after 5 or 10 years, a large loan with 20 years term and fixed interest rate, and for example a KFW 153 (KFW Standard 55 is aimed for) with 20/3/20.

It all has advantages and disadvantages; especially if you split the bank loan, switching to another bank is not so easy because of the ranking in the land register.

Note --> Due to current interest rates, combo products like e.g. building savings contracts / fund savings plans or life insurances are not an option.

No idea, but already coming around with wise sayings? There are definitely cases where BVS make sense.

To get banks and credit intermediaries involved (the first impression / knowledge I see as quite important).

The computer decides; not your tie.

Step 5.2 - Especially the point of special repayments which are also possible with KFW I see as quite important and should be focused on in my opinion (is considered).

???

Proof of personal contribution (how can this be presented)

Personal contributions under €10k are normally recognized without much proof. Higher personal contributions usually have to be confirmed to the bank by an architect or similar. But it depends on the bank.

And there is much more to say; but just go to a bank. Then you will be a lot wiser.

Oh, and when building, everything tends to get more expensive, and there are always surprises.

Thank you all for the initial explanations.

From this, I gather that my intended approach isn’t so bad after all. I would like to address a few points again. ;)

One should know what they want and how much is available. An early conversation with one’s house bank is never wrong.

A self-imposed limit is in place and was made with common sense as well as based on a household budget book and other considered aspects.

Everything has pros and cons; especially if you split the bank loan, switching to another bank is not that easy because of priority in the land register.

Yes, that was known and I think it has to be checked on a case-by-case basis using a comparison of different financing models.

No idea, but already throwing around wise sayings? There are definitely cases where BVS make sense.

Well, I wouldn’t say no idea. I think everyone has experiences/insights gained from threads and questions here or elsewhere. That also includes my initial assessment regarding the current interest rate situation related to a building savings contract in construction financing. In my opinion, the calculation (e.g. with a building savings contract) only adds up if the savings contract after deduction of costs and taxes brings more value growth than the loan costs.

The computer decides; not your tie.

99% for sure. Nevertheless, I think some preparation and especially informative knowledge doesn’t hurt in such a complicated topic. Because personally, I often have the impression with advisors that through clever articulation as well as their gestures and facial expressions, conversations are made more casual to make the customer feel safe (I don’t want to generalize, just a personal feeling).

???

I wanted to indicate that for me personally, special repayments are an important aspect. In some products, this is only limitedly or not at all possible, e.g. KFW 124 is not possible in this sense but only with a prepayment penalty.

Own contributions under €10k are normally recognized without major proof. Higher EL often have to be confirmed to the bank by an architect or similar. But it depends on the bank.

For me, it was just not clear how the bank or other financial advisors include that in financing in advance. Or whether it is no longer taken into account at all. (thus possibly the loan might be granted a better percent rate).

Yes, the visit to the house bank or financial advisor will definitely happen. I also think that with each conversation you get better or fitter here and know what matters. For me, only the direction or the way was not quite clear. Whether, for example, it is better to first go to the "independent" financial advisor or to the house bank.

Regards Andreas

Good post :)

I think additional costs are still an important topic, in Baden-Württemberg there is another roughly 11% on top of the purchase/construction price! We didn't have that on the radar at the beginning.