Insightful Tips for Choosing your Construction Loan Lender
If you've never built a custom home before, the lending process that is involved can have a few new twists and turns you may not have experienced before. Construction loans are special and very different from other real estate loans. This article will help provide you some insight and tips on what to expect and considerations on how to choose the right lender.
The first thing to understand is that construction loans are generally considered by banks to be on the risker-side, therefore not all banks offer them. For the lenders that do, the rates, bank policies, customer service and overall ease of use can vary greatly from lender to lender. So, it's important to talk with your builder about their experience with the lender you are considering proceeding with. With construction loans, it's not always just the best interest rate that can be the biggest benefit to you through the process.
In addition, in nearly all cases, the lender will require that the builder be approved with them. What does this entail? Well, the lender will have their own method of vetting the builder to make sure they feel confident in the builder's ability to not only start your project, but also take it all the way through the successful completion. If you have a lender that you've selected and your builder is not on their 'approved' list, it is possible they can be added through an application process that your builder will handle directly with your lender.
In many cases, though, its your builder who will recommend lenders they're already approved with and know what to expect during the building process. This is because the builder has worked with the lender through other local projects and has a good working relationship with the lender. Why is that working relationship so important? Well, unlike other real estate loans where there's generally one transaction, a construction loan operates differently. Construction loans are set up in a way where there are a series of mico-loans (called draw requests) that are fulfilled as progress on the house is made. As progress is made on your build, the builder will request funds based on what has been completed since the previous draw.
Each time your builder submits a draw request to the lender, an inspection by the lender will be performed on the project to ensure that what the builder is requesting has actually been completed. In certain cases the lender will advance funds to the builder (such as deposits for materials like windows, custom doors and appliances that must be ordered several months in advance).
Your builder can provide you insight as to which lenders in the area will offer you the best service during the construction of your home. Prompt bank inspections, accurate funding on each draw request, and their assistance with critical advances for materials are all hallmarks of a helpful and good construction lender. Having an unhelpful or slow lender can delay the progress on your project and ultimately cost you more money (not to mention unneeded frustration during the build for both you and your builder).
Sometimes other considerations come into play during construction, such as unforeseen delays that may push your project a month or two past the term of your construction loan. Recently through COVID, builders have seen this with materials delays on everything from windows to spray foam. A good lender will show some grace with minor delays and make the process of getting an extension on your construction loans easy, painless and inexpensive.
In addition, on occasion some homeowners want to make improvements to on their new home that were perhaps unforeseen during the design process (such as a higher level of custom cabinets or bonus room over the garage). Some lenders are easier to work with than others on these 'change order requests,' and, if needed, increasing the funds to make the change to your home.
Different banks and credit unions will also have a variety of different options they can offer. These include one and two-time closes, as well as other loan options that may be appealing to business owners vs. customers who are W-2 (employees).
All of these factors (and more) are good reason to listen to the recommendations your builder when they recommend a lender to use. Remember, you can always apply to refinance your mortgage with a different lender at a later time. One other important note: the credit bureaus will allow you to apply to at least three construction loan lenders within a two-week time period and it will only reflect as one 'hit' on your credit. This gives you the ability to 'shop' around without having a dramatically negative effect on your credit.
Having a construction lender that provides excellent customer service and goes out of their way to be helpful throughout the build process is worth their weight in gold!