What is so special about equity?
Equity is the determining factor in loans. It is the difference that makes a house your best financial tool instead of your worst financial burden. By building your own house, it will have over 50% of your equity in it. That’s a point that takes most homeowners around 20 years to reach.
That is why doing all the work yourself boosts you ahead of the other homeowners that hired a contractor or contractors. It puts you ahead by many years because one problem we have is to get through the “difficult years”. Usually, in our first years of starting a family, getting a house, and finding a career, we have a lot of difficulty making our paychecks stretch to meet all the demands. There never seems to be enough money.
That’s a common struggle in the lower and middle class families. Usually, by the time people have been working for about 20 years, things are going better. Their wages have increased, medical bills have been beaten down, and they can refinance their homes or take out a second mortgage for business ventures or to create a smaller mortgage payment. Equity in their property makes it easier for them to move around financially so they’re not so restricted by high payments.
One other thing, equity really is power. It helps out a lot more than you think. Here is my personal example of how equity helped my wife and I obtain our house. This is my own example and it might give some ideas to help your project get started. I should caution that I took a few chances by over extending myself by using credit cards to build my house. I thought I had a secure job to make the payments, but nothing is secure anymore I believe. My gamble worked out in the end, but it was really stressful!
Here’s our story:In 1992, my wife and I decided that we were going to build our house by ourselves. We made the plans and restructured our budget to allow money for building materials. We were able to free up a few hundred dollars each month. I did all the necessary homework to find out just how to build a house. It was confusing and at times very discouraging. At one point, we even went to look at Mobile Homes. But, we stuck to our plan in the end.
We started building in the fall of 1993. Things looked great at work and I even got a big promotion that meant we could pocket almost $1,000 a month for our house. I started the foundation, built the floors, the walls and the roof. I did some of my electrical systems and some plumbing. Life was good! We were almost giddy every time we went to the house to do work. My wife stayed home most of the time to take care of our two young children while I was playing Mr. Carpenter. I even felt like a real carpenter. By the spring of 1994, I had it pretty much enclosed. It looked good. It seemed that we would be in our house in less than a year.
I should have known something bad was on the way because we were actually starting our house and paying cash for everything. I kept thinking to myself, “We are having success and that has never happened to us before”. Sure enough, The North American Free Trade Agreement was passed. I never saw that one coming although I should have. The U.S. lifted tariffs on foreign products, and Canada flooded our markets with inexpensive forest products. That made the big company where I was working suddenly become uncompetitive and so several plants, not just ours, were shut down. In only just a few months the company stocks that I had planned to fall back on in difficult times dropped to about one-fifth the value because of an accounting scandal. Life can turn on you in a hurry. So, I had no job and very little money left to support us. I cashed in what stocks I had, bought metal for the roof, and had a well drilled. Then we sealed up the door and window openings with plastic and waited to see what was going to happen.
I did odd jobs trying to make a buck to support us. In 1995, I received a letter from the company where I had worked. It said that I could receive funding to go back to school. This is available to all workers displaced by NAFTA. I could only get funding and unemployment for a year and a half, so I went to a Vo-Tech and learned about computers and electronics. Anyway, I decided to take a chance at that point, because our house had been sitting there for many months. We had a lot of credit cards that had available credit on them. So we worked on the house while I was going to school. In the fall of 1996, I decided to try to get a loan to completely finish the house. It looked finished from the outside, but the inside needed a lot more work. I had all the electrical and plumbing pretty much finished. The walls had sheet rock. I had put about $28,000 into materials so far. I estimated that we would need around $28,000 more to completely finish it.
Being that I was unemployed, no banks would lend us the money, and they were even snotty about it. I could see the same look on the faces every place I went to ask for a loan. It was as if they were saying, “Get out of the way you piece of filth and make way for those with money”.
Eventually though, we was able to find a loan broker that got us a loan.
He found a construction loan that was offered from a private lender. I kind of felt like it was one of those shady deals at first, but it was actually a wealthy, elderly woman that had her sons managing her estate. The loan was for $28,000 at sixteen percent interest for six months. It sounded like high interest, but quite often construction loans are like that because they are always short term. Our house appraised for $71,000 in its unfinished state. I was so surprised that my labor was worth so much. I spent $28,000 and it was worth $71,000, not bad. The loan went through smoothly. The house was its own collateral. It took us only two months to finish. The total amount of interest paid on the construction loan was about $1300. It was a small price to pay for a loan of that type.
The broker had to use some clever tricks to get us the mortgage loan though. We got a nonconforming loan because I was unemployed. It was nine percent for two years and then would go variable at which time I would be working and we could lock in at a lower, fixed rate. Still, we had to show some income. I couldn’t show unemployment as income, besides lenders don’t think it’s very funny when people apply for a loan with no way to pay it back. We got a loan on “stated” income that determines ones income by how much money goes through a checking or savings account for a certain time period.
My wife had been doing kitchen shows for several months. She would take orders and the money for those orders, then deposit the money and write out a check to the kitchen products company when she placed the order. She only got commissions on twenty percent of everything she sold, but our checking account had several thousands of dollars going through it each month. It had the appearance of a good income. This type of loan is usually used for businesses that have unusual forms of income and profits. We consolidated the bills we had accumulated by building the house. The credit cards were paid and the nasty phone calls from creditors suddenly stopped.
We finished our house in the spring of 1997. The loan broker told us that the only reason we was able to get a loan was because the equity in our home was so high. I had no job, but I did have something of value, my house.
I knew a man that started building houses just for fun. He was a teacher, but in his spare time, he was a house builder. He would move into a house after he had finished it then start another house. He would live in the house for two years, then sell it and move on to build another house. He did this several times, each time cashing in big on the equity for his labor. He is now well off and will never need to work again.
There are many people that do this and its big business to them. The one stipulation is if you are not a contractor and you don’t have journeyman’s licenses in plumbing, electrical, and other systems, you have to live in the house for a specified amount of time that varies from state to state before reselling.