All About Financing the Construction of Your New Custom Home!by John Price on 07/08/10
All About Financing the Construction of Your New Custom Home!
This is a difficult and complicated subject. My first advice is to ignore the big banks and go to a community bank or a savings and loan that knows your community. They will have more freedom in decision making than a big bank.
Again, I cannot name names. If I mention a bank by name, it has to go through their legal department and there will be so many caveats to what I want to say that it will make no sense when the lawyers are done.
These are the general rules, but a local bank can break any of them.
1. Get pre approved for your permanent loan. A bank does not want to make a construction loan unless they feel confident you can get permanent financing when your home is completed. Construction loans are meant to be temporary and the bank wants out in a reasonable time period.
2. This is new, but in today’s environment, they generally want 20% down. (I’ll explain possible significant exceptions later.)
3. The bank cares who builds your home. The bank will want to see bids from a builder the bank trusts. They are not trying to tell you who to get, rather they want to be sure it is a qualified contractor who has the ability to complete the job as promised.
4. In Jefferson County many buyers serve as their own general contractor to save money. Many local banks allow this as the savings are real. But if you are to be your own general, the bank wants to know you; not just you credit score and amount down. They want to feel confident you can complete the project.
It starts with a set of plans and a bid. You go to the bank and find out how much you can borrow. The bank will have the completed package appraised. Appraisal does not always equal or exceed costs. If you are building a dream home and choose granite counter tops, the best kitchen ever, a pool, expensive woodwork, etc., your legitimate cost could well exceed a good appraisal. It does not necessarily mean the contractor is puffing costs. It could mean you are over building for the market. That can easily happen on a custom home and many people say the heck with it. This is what I want and I’m going to build it. It means more down payment. Or you might scale back on some items and get it bid again. It really depends on individual circumstances.
During construction, most banks will want the money disbursed through a title company. The title company makes payments to your contractor on your behalf in return for proper paper work showing all the sub contractors have been paid by the contractor. A very few banks might let you make your own disbursements, but I would recommend you go through a title company.
I’m going back to the 20% down issue on a construction loan. The permanent loan might take much less down and you wonder why the gap. It is a cushion for the bank. One builder has told me he has a bank that totally ignores the 20% down rule if the permanent loan is in place. I do not know that bank, but it makes sense. They specialize in construction loans and do not make permanent loans.
I know of one institution that makes a combination construction/permanent loan. They keep the permanent loan. If they approve you, they approve you and you save closing costs by only having one closing. I had one customer who went to a big bank and his construction loan did not appraise. They had a bad appraiser who was not local and the lot appraised at about ½ value even though recent sales supported a much higher value. My customer could not get through the bank bureaucracy to get it corrected. I directed him to the local savings and loan and his construction loan was approved and closed in about 2 weeks. If he is not moved in, he is about to move in. He has a beautiful home and a good banker.
The bankers I deal with want you as a customer, but they also want to help you. My banks have referred many of my customers to competitors of theirs just to help that customer. You might talk to bank A, but it is not a fit. Bank A might refer you to bank B. Listen to bank A and go talk to bank B. A good community banker tries to help the customer even if he sends that customer to a competitor. Bank B might send somebody else to bank A, because it is a better fit. The small town community bankers all know each other and really do try to help the customer go to the best place for the customer.
There is more to it than just down and interest rate. How will the bank work with you if you have a cost over run? Local community banks have the ability to make local decisions and work with you. The big boys do not. If you get a cost overrun on a kitchen with one of the big banks, be prepared to dig into your pocket. If you get a cost overrun with a local bank, there is a good chance they will modify your loan or move money around from a different construction category.
You may have seen in the news that some regulatory reform is coming in the banking world. I do not yet know how this might impact what I have just written.
In this published article, I cannot name names but I will give you suggestions on the phone or with a personal email. You can call me at 314-827-5263 or email me at firstname.lastname@example.org.
Talk to that local banker and ask his advice. Stay away from the big guys.