People get overwhelmed when it comes to the construction loan process. Most believe that it is cumbersome and ultra-difficult to get one. Many want-to-be custom home clients believe that they have to put 20% down or sell their house first. People also make assumptions that all the lenders and banks have the same process and guidelines as each other.
If you venture to the web for answers, there is a lot of misinformation out there. I believe that choosing the right lender for your construction loan is just as important as selecting your builder. Picking the wrong lender could end up costing you thousands, plus a lot of aggravation.
Ask your friends and colleagues who have recently constructed a home who they used and what their experience was like. If the same name pops up over and over, that is usually the best place to start. Gather those names and start making phone calls.
Before you call though, you should have the following information ready: lot value, how much is owed on the lot and approximate build costs. You should also let them know whether or not you plan on selling your existing house before or after the new house is built (if this is applicable to you). A smart lender will ask you about these things, as it will be an important part of the process of discerning the parameters of the loan you are interested in.
You will then want to ask your potential lender about the different types of construction loan programs they have. These should be your Top 10 things you ask:
- Do you offer both a one-time close and a two-time close? Have them explain the differences and the pros and cons of each. If they only have one or the other, or both – your future lender should be able to give you enough ammo to decipher what might be best for you and your family.
- What is the maximum loan to value that you offer? Everyone is different. There are some places that go up to 90% – 95% loan to value and some that are capped at 80%. Based on the amount of cash that you would ideally want to put down, the answer to this important question will help narrow down your search.
- What happens if I go over budget? Also, an integral question. In all of the construction loans I have done, most everyone has changed their mind on something, causing a budget over- run. It is a good idea to find out what the lending company’s guidelines are regarding this issue.
- What happens if I end up under budget (yeah, right!!)? I laughed at this when I wrote it, but decided to keep it here because, hey, miracles do happen! Ask your potential lender what happens to your construction loan if all of the funds don’t get used.
- What types of terms do you offer on your loans? 30 year terms? 15? 10? Again, everyone is different.
- Are they fixed, ARMS etc.? This is another arena where there are tons of disparities between lenders. Some have fixed, some partial fixed and some with balloons. Your preference will be determined by your risk level or long-term plans. Again, an astute lender should be able to speak to you regarding how each of these would affect what your goals are.
- What are the interest rates currently? If you do a two-time close loan, those rates will most always be higher than current market, just FYI. So, quoting final loan interest rates on a two-time close will always be a guess because no one knows what the rates will do in the future. However, one-time close construction loans lock in the rate ahead of time. Lenders vary greatly here also. Always ask about the current interest rates.
- Do you charge points or extra fees? Another big one. Ask if they charge origination points, discount points, processing and underwriting. Be sure to also ask about the costs for the draws and any other lender fees. Really, the only fees you should care about are the lender fees because everything else is pretty much the same no matter who you go with.
- What happens if I go over the allotted build time? With supply chain issues, this issue is popping up more and more. Is there a cost? What is the maximum amount of time allowed? What happens if that time still isn’t enough?
- How long does it take to close on a construction loan? Some lenders take 35 days and some as long as 120 days to close a construction loan. With the volatility of the materials, it might be in your best interest to work with someone that can get your loan done quickly.
- Did I get along with the person that I spoke to? A construction loan is not like a home purchase loan. You will be working with that person for roughly a year in some capacity. You will definitely want to pick someone who you feel will continue to answer your questions throughout the course of your build.
- Did the Loan Officer I spoke with know what he/she was talking about? You also want to have confidence in your lender’s knowledge of the construction process. There are a lot of intricate and moving parts to these loans, so you definitely want to feel comfortable with the knowledge level of the loan officer you choose to work with.
Once you have recorded the answers to those questions, it is time to narrow it down and complete an application the one that is the best fit for you and your situation.
Building a custom home is an exciting time! Picking the right builder and the right lender can help to make a dynamic time also a very smooth one.