From all we have said so far about getting your house construction loan lined up, you may suppose that we have painted a picture of going to the bank, hat in hand, and more or less throwing yourself on the mercy of the lender!
Far from it. This is a business transaction, pure and simple. This is how the bank makes its money. Don’t forget that you are the customer. Don’t deal with someone who doesn’t treat you like one.
You should actually shop several different institutions to see which has the best deal. The key areas you want to compare are interest rate and loan fees (points).
In many areas of the country the mortgage market is quite competitive, with commissioned salesmen (morgage brokers) handling most of the application process for permanent loans. As a person seeking to build their first home, you should probably try to deal with a loan officer rather than one of these salesmen.
The salesman is certainly as well qualified as the loan officer to check your financial qualifications, but the loan officer may be in a better position to tell the bank’s loan committee how well prepared you are.
APPLYING FOR THE HOUSE CONSTRUCTION LOAN
Here are some important instructions you need to follow in actually approaching a lender and applying for your house construction loan.
Overcoming A Bank's Reluctance To Give You AResidential Construction Loan Getting a residential construction loan may be difficult than it used to be. This is because of the seismic collapse of the housing bubble, resulting in a world-wide meltdown of the economy.
Fanny
Mae and Freddy Mac as noted in the page on Funding, are private companies which were originally chartered by the federal government to help lower income people afford to purchase a home. Recently they held or insured over half or the mortgages in the U.S. Their current status is still in flux (October, 2008).
Bankers want to make money by earning interest on loans. They don’t want to be in the construction business. So the banker will want to be satisfied that if he lends you money to build your own home, you will complete the task in an acceptable and timely manner, and produce a home that adequately protects his investment. That is, one that is structurally
sound and aesthetically pleasing (resalable).
First ImpressionsWhen you contact lenders, impression plays a large role in how successful
you are. Always try to work by appointment rather than just showing up. By all means, be clean and neat and well organized.
Try to present yourself as a business person. It’s OK to be excited about your new home, but try to give the impression that you can make rational, coherent decisions about it . . . that you are not running on emotions alone!
Here Is What The Banker Will Want To Know Before He Lends You The Money To Build Your New Home1. The banker will want to feel comfortable that you have the knowledge required to be an owner builder and that the home will be properly constructed. In other words - Do you know what you are doing?
If you are unable to carry the project through to a successful completion, the banker may have to step in and do it himself to protect his investment.
If he has to take possession of the home at some later date - through a foreclosure for example (bankers always look at the worst possible case) - he wants a home that is saleable.
Your Cost Estimate and Constrution Schedule and the subcontractor and supplier contacts you have made while putting them together will help him see that you have prepared yourself and that you have the "right stuff" to pull it off!
2. Do you have an adequate “stake” in the project? - The banker feels like you are less likely to simply walk away from the project should something go wrong if you have something substantial (financially) to lose. He figures you’ll think twice before walking if you have some serious bucks on the line.
3. Do you have adequate financial resources to carry it off? - The banker knows that the draws will not always come in time to keep construction bills current. He does not want to be associated with a project that is plagued by tardy payments to subs and suppliers.
4. Do you have adequate income to cover the permanent mortgage payments after construction is completed?
EXHIBITS TO TAKE WHEN APPLYING FOR YOUR HOUSE CONSTRUCTION LOAN
Overcoming doubts by being prepared
Since you are not a professional home builder, the banker will be looking at you very carefully. The best way to overcome the banker’s doubts about placing his investors’ money in your project is to be totally prepared and give every indication that you are knowledgeable and in control.
The banker will scrutinize all of the exhibits associated with your loan application. These will include your own Financial Statement as well as the Plans and Specifications for the proposed home. He will also be using his people experience to size you up.
Here Are The Things You Will Need To Take When You Approach A Lender.
1. Plans and Specifications - Make sure they are as complete as you can possibly make them. The banker will determine the amount that he will lend based on the market value of the finished product.
The only way he can determine the market value is to have a complete set of plans and specifications. Make sure that a plot plan is included to show how the home will sit on the lot. Also, plan to have at least three crisp, new copies of the plans and specifications. Dirty, dog-eared blueprints make a very unprofessional impression.
2. A Survey and Legal Description of the Lot - The banker will be interested in the location, shape, zoning, and other aspects of the lot. He will also be interested in its value and the fact that you own it. At one time, bankers would not lend money to build a home on land that you do not own free and clear. Now, however, many banks will lend the money for both the lot and the construction of the home.
3. Personal Financial Statement - Make sure this is in a standard format - showing your assets, liabilities, and net worth. If you are working with only one bank, it may be good (or even required) to use their forms for the financial statement. Get your accountant to help you prepare it.
Make sure your financial statement is absolutely accurate. Don’t try to hornswoggle a banker on a financial statement. He looks at them all day long. He’s forgotten more about financial statements than you’ll ever know.The banker is interested in your real position. If you’re deeply in debt or you have to rely on things like personal jewelry and stamp collections to make your statement look good, you had better start looking for a co-signer with some real assets. Click here for a generic form you can use.
4. List of Subcontractors and Suppliers - This will demonstrate that you are serious, that you have done your homework, that you know what you are doing, and that you are ready to begin.It may also be helpful to be able to tell the banker some of the builder references you have on each sub. Even though you may not be an experienced builder, the banker will feel better if he knows that the project will be carried out by experienced, competent subs.
At this point it may be better not to show your brother-in-law who used to work for a plumber as the person who will be doing the plumbing on your job - even if you believe him to be totally competent! The banker will feel safer with someone who is engaged in residential plumbing every day.
Your house construction loan will not be conditional on actually using the subs you present here, but don’t be deceptive. If you do plan to use your brother-in-law to do the plumbing, be prepared to explain why you think he is qualified to handle the job, and have a professional lined up and prepared to step in should the need arise.
Use our Subcontractor Directory to organize your subcontractor information. Also use our Subcontractor/Materials Master List form. It is used to help you keep track of the subs and suppliers you are using on the project. We’ve found that it is very convenient to have them all down in one place.
5. Materials Take-Off and Cost Estimate - Again, this information, when presented on the forms we have supplied, will show that you are going about your building project in a very organized and professional way.
Have photocopies of this material available to leave with the lender if necessary. Don’t take your only copy. Review all materials before you go so that you are prepared to answer any questions that the lender may have.
Don’t be embarrassed if he asks you a question you can’t handle. By this time, you probably know more than 80% of the small builders he deals with. Just admit you don’t know, but that you’ll find out.
6. Construction Schedule (Critical Path or Bar Chart) - Demonstrating your knowledge of the construction process as contained in your construction schedule will be helpful in adding further reinforcement to the fact that you are competent to contract your own home.
Many lenders may never have even seen one of these. You can have a copy available if the question should arise. Otherwise, this is something you may not need to submit. But don’t hesitate to show it.
OTHER REQUIREMENTS FOR THE LOAN
The bank will also have other requirements associated with the loan. These may vary from location to location, but will usually include adequate insurance and one or more surveys.
They will want you to carry a builder’s risk policy which essentially protects their investment should the home burn down during construction. They may also want you to carry a certain amount of liability insurance.
You should be adequately covered here, regardless of the bank’s requirements. Talk with your insurance broker. They may even want you to have an account at their bank.
Once the bank has approved your new home construction loan, they will issue a loan commitment, which spells out all of the details. Click here to see a copy of a Construction Loan Commitment issued by a Florida savings and loan.
