Wow, where do I even begin with a construction loan? There’s so much I want to go over about this, so I guess I will start at the beginning. First, before you get a construction loan you do have to have quite a few things completed.
1. You must own your land, and depending on your situation you might have a land loan with another bank and that is okay.
2. You must have your architectural plans completed and engineered.
3. You must be ready for an exhausting 2 to 3 months of communication with your loan officer.
Not very many banks do construction loans. US Bank is one of the banks I mentioned in my land purchasing post that does land loans, and they also do construction loans. I got some info from them about doing our construction loan with them, but ultimately we went with another lender. We got our construction loan through Flagstar Bank. And we worked with a woman named Nikki out of San Diego.
Nikki is really nice and amazing, though she drove me absolutely crazy during the process. I know it wasn’t her fault and she really did a great job, but it’s a lengthy process and there’s a lot of information needed. They will ask you for so many things. Maybe more for us because we are business owners, versus if you have a good tax paying job you might get off a little easier. But, be prepared to hand over years of bank transactions, over ten years of addresses where you lived (who can even remember that?!), all the information on you current home – whether you rent or own, your lease or mortgage info… It doesn’t seem like it’s a lot right now, but trust me it is. It was minimal getting our land loan with US Bank, yeah we sent over some income information like tax returns, etc. And we were pretty much done. But, with this not only do they need all your personal information and business information if you own a business and get paid through that business. But, they also need a lot of information from your builder/contractor as well.
One of the other things to keep in mind is that they are very thorough. Once the personal information is taken care of, you are kind of prequalified in a way I guess because you keep moving forward. Then they will get lots of information from your builder to quality them or their company to build your house. After that, you’ll send copies of your plans, cost sheets from your builder, contract from your builder, and a materials list. This is all so they can get an idea of what you’re building and what kind of materials you will use, which will help determine your budget and also the final value of the house. All of this goes to an appraiser (that you pay for by the way) and you get an appraisal for your yet to be built home.
One of the main things they are looking for with the appraisal is that you can build the home you say you will with your budget, and also the finished value of the home to make sure that you aren’t building a home that will be worth less than what you paid to build it. Our appraisal came back good, and we also believe that once the house is done, it will appraise for more – which Niki agreed with. But, it let us keep moving forward again.
After the appraisal, all the info goes to a budget review. This is where they do fact checking and make sure you have the funds necessary to build your home. You have to have the funds for every single item for your home. Even if you want to save money and do work yourself, you have to show you have the funds available. We were planning on doing some work ourselves but we had to list everything on our budget as if we were going to pay for it, and hire labor to have it done. You can also pay for things out of pocket too, but you still have to show them on your budget as well. The bank wants to know that your home will be completely built, as it’s a liability if it’s not. So, they want to know you have all the funds you need to make that happen. If you end up doing work yourself, then you don’t have to take as much of a loan out and you will save money. But, you can’t count on saving money as a means to not having that money – you still have to show you have it. Which is super frustrating because if you have all the money – why do stuff yourself?!
We started our loan process at the beginning of May, and at the end of July we finally closed on our construction loan. And, I will tell you that I don’t let things sit, I did them all right away. I answered all Niki’s emails and gave her all the information. We did have to wait a few days here or there for other people to get back to us, but we did it quickly and so did our builder. So, be prepared for a lengthy process, and if you tend to lag on things – remember it will take you even longer!
We ended up going with a twelve month construction loan that rolls right into a thirty year fixed rate. This option is a little bit higher interest than the kind of loan where you do two loans – one up front and then once you’re about three months into the build you do another one which can sometimes get you better interest rates for your thirty year fixed mortgage. But after all the stuff we went through to do the loan, I didn’t want to deal with possibly having to do it again in a few months for the second portion! NO WAY! So, we opted to do the thirty year fixed and then we plan to refinance once our home is completely finished for a better interest rate. We might end up paying a little higher interest rate during construction, but at this point – for us – it was worth it to be able to relax and be done with this part of the process. Finally! Then, we’ll just have to go through another process of refinancing once the house is done, but that will be much easier as it will be more traditional and we’ll have a house to show for it! So, for now I am happy with the decision. And right now, we’re focused on getting started on work on the land!