Construction financing can seem overwhelming and confusing. Really, the best thing to do is find a good lender! We had the opportunity to chat with two of our preferred lenders to learn more about construction loans. Check out the podcast below or read on to learn more.
What is the first step to take when looking to finance a home that you’re about to build? It’s important to find your team. You need your AVB sales consultant, your loan officer, and sometimes a realtor who all collaborate to get the best financing options for you.
Do you have a checklist to dial in the best options for clients? Yes, but a comprehensive list can be overwhelming. We prefer to meet and talk through options to see how everything applies. Generally, a preapproval letter is accurate for 120 days.
With construction and construction to permanent loans, clients often have anxiety as these are a little different than purchasing a home that is complete. Up front, we try to relieve any stress and anxiety by giving you a step by step process on the construction loan and how that rolls over into a permanent amortizing mortgage. There is a standard checklist, and then once the lender gets the application and credit score, they can get everything dialed in for you. We want to be up front and open throughout the entire process to prepare you properly.
Can you talk a little bit more about construction loan payments? You close on your construction loan up front and you pay interest only on the amount that has been drawn each month for the work completed. A lot of times, though, you’re paying off a portion of the land at closing before construction begins. For instance, AVB may have a $50,000 deposit from you up front, but the land cost is $85,000, so you’d have a $35,000 draw at closing to pay the remainder of the land. After that, the lender bills once a month. Many clients ask about auto pay and you can’t really set up an auto payment because each month will be a different amount owed. Once the home is complete, the lender will get a certificate of occupancy from AVB. You will close (get your keys) with AVB and then you’ll want to touch base with your lender to modify your loan into a mortgage.
How much are they going to draw and when? The best the lender can do is give you a range of the draws and the interest you’ll pay. Throughout the process, because you now own the land, you’re now responsible for paying tax bills, however, they are often relatively small because it’s unimproved land.
Don’t forget that you only have the one time closing, which is such a huge benefit! This makes it so much smoother for you and you won’t have double closing costs for your one home.
How long do you recommend the construction loan is? We generally do a 12 month loan, but depending on the lender, there could be flexibility if the scope of the project is different and requires more time.
Can you talk about owner contingencies? It can be challenging and lenders often rely on the AVB team as they have spent more time with you at this point. When making your allowances, it’s important to overestimate as pricing is usually not lower than when you started the process. In the end, if you don’t use the funds you put in for your loan, you don’t borrow that money. With appraisals, appraisers are looking at those line by line items that you have added to your home, but the lender always prepares you because they are familiar with other homes in the community and what they have appraised for.
Can you talk a little bit about condos and if those differ from single family homes in regard to the loan process? No, it doesn’t look any different for you, the borrower. Lenders always confirm if you are starting from the ground up and doing a construction loan or doing an end loan if the home is further along or complete, and those are specifics that may change the process a bit.
Can you tell us a little bit about warrantable and non-warrantable? Basically, there’s this criteria that Fannie Mae and Freddie Mac have laid out for attached condos. If those attached condos don’t meet certain criteria, they are deemed a riskier loan. Generally with new communities, the community is not 100% or even 90% built out, or a new phase opens and is not 90% complete. Neither the lender nor AVB will know when it will become warrantable and it is constantly changing based on further development in the community. At Consumers Credit Union, they treat it as a construction loan and it’s not as much of a concern, but with an end loan and purchasing a home that is complete, it is a different process for the lender because then investors are involved.
How will warrantable or non-warrantable affect resale? It won’t really because there are lenders that are going to finance regardless if it is or isn’t warrantable. It’s important to have this conversation early on in the process so that you know if the lender can work with you before getting too far in the process.
Is it preferable for a client to come and get pre-approved before shopping or should they look at what they’re interested in first and then get pre-approved? Most clients are already pretty dialed in when they come to the lenders and know what community they want to be in. The sales consultants are awesome at putting you in touch with preferred lenders that would be a good fit.
Most of the clients these lenders are working with aren’t first time home buyers, so they have a good idea of how the financing process works. Most clients also own homes currently and don’t want to move twice, so they are starting the pre-approval process by including their current mortgage in there.
All in all, the lenders do their best to have financing options that keep folks in their current homes because renting can be expensive. The market right now is also moving quick and is making it easy to sell, so waiting to sell isn’t a concern. Home equity lines of credit are also a great option for a lot of clients. There are a lot of options and flexibility, that’s why it’s important to meet with a few lenders and see what options are the best for you.
What about builder’s risk insurance? This is something that needs to be discussed with the you up front when you are deciding to build. The reason you need this is to cover your home if weather or theft occurs on site. Once your home is complete, you’ll transfer over to a regular homeowner insurance policy. You’ll want to shop around as there are a lot of insurance companies that don’t offer builder’s risk.
We are so appreciative that Renee Ziska from Consumers Credit Union and John Denny from Northpointe Bank took the time to walk us through this loan process. We hope it clarifies some of your questions! John and Renee are both great to work with, but we always recommend getting in touch with a few lenders to find the best option for you and your financing needs. Here are the other lenders on our preferred list:
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