I recently read in the Sustainable Industries Journal (March 04) that "mortgage banks apply lending formulas that require the value of a home to be three times the value of the land it is on". Does anyone know if this is an industry-wide metric? And is it assumed that the value is in square footage, not quality of craftsmanship and features of the house?

where I live a small neighborhood lot like mine can sell for $500,000 with no structure on it. My house itself might be valued $120,000, but together they would be worth $620,000. Almost the opposite of what you are suggesting.

That's not exactly industry-wide. I am working on a construction loan right now and my lender had absolutely no problem with my original plan to build a $60k home on a $100k parcel of land.

Also note that in many areas, builders self-impose a formula limiting the land to 20% of the total value of the finished home and land. This is part of their business model and they usually aren't working entirely with their own money.

If you run into problems with your land to home value ratio, try going to a locally owned bank rather than one of the huge clearinghouses or through a broker. With a local bank, you're probably dealing directly with someone who has real authority on the loan rather than having to go through several other people. The lender will know you and know more about relative land and construction costs in your area than any large corporate lender can. This enable him or her to properly underwrite loans that large lenders automatically peg as 'risky' out of ignorance.

For this privilege, you will probably wind up paying a very slightly higher interest rate than you might have gotten through a broker. But in my opinion, It's worth the extra $10 a month I'll be paying.

Also, if you are new to the area a local bank may be better than you are at knowing which contractors will build what they say they will at the cost they quoted and on the schedule required. Any local bank that does home mortgages develops a 'black list' over time.

-Jack

I'm a sales agent for a new homes builder in tennessee and I can tell you that it's shocking how few appraisers actually go into the home they're evaluating for the lender. Forget about what's inside, it's strictly square footage and comps. There's generally little or no attention paid to high value extras/detailing in the home.

I'm rigt in the middle of buying a home in the Dayton Nevada. The asking price was $439,000 we settled on 429,000.00. The problem is the appraisel came in at $350,000. This is a definite problem. Either the appraiser doesn't know about the upgrades or the house is not worth the amount of the asking price. What are you to do when the market is out of control?
California resident

quote:

Either the appraiser doesn't know about the upgrades or the house is not worth the amount of the asking price. What are you to do when the market is out of control?

A good appraiser does comporable sales. It doesn't take inot account much interior work, but does use the general description plus location. Your appraiser should have a least three. Local appraisers are usually better. When our house was underappraised for a refinance we asked what the comparables were - they were completely inappropriate - one was for a house on the wrong side of the tracks on a street well known for drug dealers. We found three more appropriate comparables and they gave us a new number.

My experience in Massachusetts is that the land value is roughly 2 - 3 x's value of house. You can see that on the tax appraisal site for the area. also the appraisal generally takes into consideration no of bedrooms, baths, etc and if condition of house is fair, good or excellent. Generally they are not going to base appraisal on corian countertops vs granite. I have found it is good to keep this in mind when preparing your own comps to make an offer. If appraiser's comps are accurate, the bank may be helping you not to overpay in this market. At least in Mass prices are trending downwards even in the elite markets. good luck with the home. jeanne