Financing the Dream

I’ve been investigating loans for 8 months, and I may have finally found a bank that is not completely terrified of what we’re trying to do.

This is the sobering reality of trying to build off-grid, even in a state like Arizona which has very lax building regulations. The County informed me that I could be an owner-builder, and that as long as it was conventional construction I did not have to get an architect stamp on my plans, provided they were up to code.

Enter the banks. Who provides construction loans for off-grid, owner-built projects? This is a question that the internet cannot seem to answer very well, and options vary from state to state.

Let’s start with Wells Fargo. I began my search with the local Flagstaff branch, who referred to me to their Prescott, AZ branch. I was told they could not do owner-builder loans, that I would need to hire a builder, and that the land had to be completely paid off before we could apply. We still owe about $30,000 on the land, having thrown as much money as we could at it last year before purchasing our trailer. The pros – we have equity in our land, which looks good for banks. The cons – Reality Check: we can’t take out a construction loan till the land is paid off, so that would take at least another year for us to do if we continue to be pathetically frugal.

I kept calling around to other “big name” banks. I learned quickly that having the land paid off was a big plus, though not an “absolute” for every bank. Some were willing to usurp the land loan into a 30-year mortgage after the house was done. Where we really hit a wall was with water. No City hook-ups, and no wells = must use cisterns. Reality check: Cisterns = scary for most banks. This was very disappointing to hear, since cisterns are a common off-grid option – and sometimes the only option, like in our case.

I talked with Owner-Builder Loans, which serves only three states (one of which being Arizona). They said there was a 6-month waiting list for our application to even be considered, and even if we got the construction loan, they could not carry it as a long-term mortgage. That means we would have to find another bank to convert it into a 30-year mortgage = a bit too risky for us.

I’ve been learning about how construction loans work; they’re not all the same, of course, but most of the time you’ll find that they are short-term, giving the owner a year to obtain a Certificate of Occupancy. The interest rate is very high (usually 9-12%), but it’s just for that year, and only for the amount you draw for the build, and then (hopefully) it will convert to a traditional mortgage through the same lender. With the exception of Owner-Builder Loans, you really can’t expect to be allowed to build the home yourself. Reality check: You’ll need to hire a builder if you want a loan.

I started looking into other kinds of loans in late fall last year, namely unsecured and secured loans. I filled out an information form online and immediately received tons of calls from lenders wanting to charge me 9-14% interest with 5-year terms on amounts up to $20,000. Awful, right? At this point, though, I was willing to consider anything. (What that means, specifically, is that I run it through my spreadsheet which is full of amortization charts and my family’s long-term financial plans, all connected with formulas. It’s beautiful.)

So I began to crunch numbers related to a series of unsecured loans, taking a new loan out every year or so to fund a certain portion of the house. The monthly payments would have approached $2,000 (awful), however the house would have been paid off in less than 8 years (awesome). Doable if my husband and I both work full-time; devastating if one of us lost a job or was cut to part-time (and both of those things have happened to us before).

Around New Year’s my husband and I had a heart-to-heart about the feasibility of our plan. How long could we really live in a trailer, especially with no running water, no quick source of heat, and our little boy quickly growing too long to sleep on the couch? Short-term it’s not that bad, but… more than a year….? If we didn’t have a child, we might be willing to give it more time, but… the clock is ticking. We want our son to have a home that is comfortable.

We decided that if we could not secure a loan, and move into a home on our land before the end of 2016, that we would purchase a home in town and slowly save up enough to pay cash for a home on our land one day. I felt relieved to have a “Plan B,” but also… sad. Like we were giving up, or chickening out. But we have to do what’s best for our kiddo.

Enter BBVA Compass Bank in Prescott, AZ. I’ve been working with a gal whom I expected to laugh me off the phone after our first conversation. I think it went something like this:

Me: Hi. I want a construction loan that converts to a 30-year mortgage. I am building an off-grid house.

Loan Officer: Okay, we can help you with that.

Me: …. It’s off-grid.

Loan Officer: Okay.

Me: Seriously, it’s off-grid.

Loan Officer: Not a problem.

Me: Oh… Well, I haven’t paid my land off. We still owe quite a bit of money on it!

Loan Officer: That’s okay, we can absorb the remaining land principal into the mortgage.

Me: Oh…. Well, I can’t dig a well. There’s absolutely no water on my land! I would have to use a cistern. Terrifying, right?!

Loan Officer: Do your neighbors use cisterns?

Me: Yes, all of them do.

Loan Officer: Not a problem, then.

Me: …..Okay…. Hold on a sec. *runs into other room and starts woohoo-ing and jumping up and down*

I’m trying not to let myself get too excited, partly because we’re still going through the lengthy application process and goodness knows what wrenches in the machine may await us… and partly because we might be about to take on an additional $285,000 (max) in debt. I need to remember that debt is a tool, as motivated as we are to pay it down quickly.

If you amortize it out over 30 years with 5% interest, that’s about $1,520/month. That’s including utilities (we’ll utilize solar, maybe wind, rainwater catchment, composting, etc. on site). When you look at national averages for comparable housing (and of course the numbers vary depending on where you look), you’ll see a range of $1,200-1,500 per month for rent and $150-300 per month for utilities. So… we’ll be perfectly average. (Hurray?)

I’m meeting with my builder on Wednesday to discuss house design and construction costs. We’ll see what other reality checks are headed my way. Wish me luck.