On your “road” to building your own custom house, obtaining a construction loan is usually an important and, most of the times, necessary step to be covered in order to see your plans materialized, therefore it is essential to find a good construction lender.
However, since it implies some serious planning and decision making, you have to take your time and carefully weigh your “steps”. Finding a good construction lender is an aspect that plays a major role in successfully finishing your related project. Hence, the article will deal with the circumstances one needs to take into consideration in order to get to enjoy the benefits of a custom home.
Dilemmas – Which Is the First Thing to Take Care of?
In capacity of customer searching for the proper loan and construction lender, the process can be quite problematic because it makes you wonder which of the two “elements” should precede the other? Should one first find the construction lender and then choose the program or vice versa? Well, it is recommended that you examine both aspects altogether- if you discover a profitable loan program, go further with your “investigations”. However, you might as well find a very experienced loan officer who provides you several good programs. In this case, it is worth spending a little more money but enjoy qualitative services in exchange.
Qualities of a Good Construction Lender
In picking up your construction lender, don’t get fooled by the person’s ability to make you feel comfortable. Don’t hurry to select the first business that appears to be appealing and carefully read the ads on construction financing that you come across on the Internet. Although very vast, this network comprises few advertisers who are actually specialized in this kind of lending.
A good construction lender should be a professional expert adviser that subordinates his expertise and judgement to the customer’s best interests. Unfortunately, many of the available practitioners base their activity on the policy that the client is always right and they tell you everything you want to hear so that they can make you keep resorting to their services. The construction lender should be like a doctor, revealing unpleasant truths for the “patient’s” later benefit.
An expert who risks losing the deal because he has the courage to approach “hard” aspects is worth your attention. Doing so, he usually helps you prevent “nasty” surprises from occurring in the course of the project. After all, you invest lots of money and time in it and the last thing you want to happen is that this high stake to be wasted because of a person who is afraid to tell you the truth or acts upon ignorance. Moreover, the construction lender has to listen to you and present some pertinent options that suit your needs. If he is already talking about loan programs without asking you about your situation, it means you have to keep looking.
To Use or Not to Use a Middleman?
In this quest for the “right person” to counsel you throughout the construction project, you could have recourse for help from a mortgage broker. He represents an independent loan originator who can submit, on your behalf, loans to several lenders. Acting like middlemen, the brokers are primarily paid by the lender by means of wholesale pricing on loan programs.
Since this person comes as a third party between the borrower and the lender, the question “Is the middleman really necessary?” arises. Here are several reasons why eliminating the intermediate party and going directly to the bank might be in your detriment:
- the bank loan officers are salaried and not commissioned; this tends to make them less zestful and experienced in arranging you a really good deal;
- being product-oriented, banks offer only a limited range of programs; in case you don’t like or qualify for them, then you have to try somewhere else, having wasted your time and not having got any result;
- banks have the tendency to exclusively place the stress on the construction loan, neglecting other points of interest that might prove useful for your finances;
- the documentation that you directly furnish to the bank is used as when first handed, even if the situation might change or be represented more favorably in the meantime;
- the banks perceives you just as another liability.
On the other hand, mortgage brokers are increasingly appreciated by customers mainly due to the following benefits:
- seeing that they are paid only if the loan closes, they are more motivated to do their job;
- they have access to almost every loan program in the marketplace, which facilitates the selection of the best offer like in a one-stop shop;
- being required by law to disclose their fees, the client knows exactly how much they earn;
- good mortgage brokers have an analytic character, comparing and contrasting the pros and cons of various loan programs, which enables them to easier identify the best option;
- they can help clients cosmeticize and present their package in a more favorable light to the bank;
- since their career depends on referral business, they are more concerned with the customer’s satisfaction.
But since nothing is perfect, you have to be careful with whom you choose to be your mortgage broker. This is why you mustn’t “enter this field” unprepared, but rather educate yourself in advance. In order to recognize a good loan officer/broker from a bad one, you have to test their construction loan competency. The perfect candidate has to be a savvy in the related field and succeed in providing accurate information.
Test your Construction Lender
Here are some questions that might put the construction lender to a little test of aptitude:
- What is the difference between LTV (Loan on Finished Value) and LTC (Loan on Cost-to-Build), and how does it relate to your best programs?
- Why is title insurance more expensive on a construction loan?
- What is the difference between a voucher system and a draw reimbursement system?
- Calculate a nine-month interest reserve.
- Why is an indemnification agreement necessary?
It is on the clarity with which the construction lender answers these questions that your decision depends. If he can understand, articulate and explain these issues comprehensively without trying to slide lies by you, then you have a deal. Otherwise, you know what you have to do. Continue the search. If the “testee” doesn’t know all the answers, but is willing to research them and get back to you deserves some credits.
A trustworthy construction lender has to be endowed with patience and honesty. If he asks you many questions, this is a sign that he is interested in you and strives to find as much useful information on your situation as possible. Thus, he can later contrive a solution specific to your case. The ability to build the most cost-effective method of successfully covering all the financial steps of your project (such as risk management, cash flow, and lender approvals) requires experience and the power to identify patterns from the construction lender.