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Credit Information15 Construction Loan "Inside Secrets" To Building Your New Home.
by:
Rick Gomez
1. Which construction loans are accessible and which one should you apply for?
Home loan banking and the computer network has changed the mortgage and construction loan industry forever. Today's construction loan choices include the 30 year fixed, 15 year fixed, 1 year ARM, 3/1 ARM, 5/1 ARM, 7/1 ARM, 10/1 ARM and don’t forget the popular interest only loans.
The construction loan of the past was a short term 1 year loan that the client would-be have to finance
into a new loan once the construction was completed.
This two time process cost the client two sets of closing cost and you would-be have to re-qualify for the new loan once the home was completed.
The most popular construction loan now is the "One Time Close" but not all are created equal. Simply like any product there are the better loans, nice loans and downright bad loans.
With today's technology you now have the ability to obtain a construction loan from the better banks in the country and sign your loan documents at your local title institution or written agreement
office. This benefit allows you to have the most competitive construction loan available.
The loan that you should apply for is simple; ask for the lowest rate, one time close for a specific period of time that you think you'll be living there.
2. Which lenders/banks have the better construction loans and what do you need to apply?
There are plenty of banks willing to lend money for mortgages, refinancing, home equity loans and every another type of loan. But if you're planning on building a new home, wherever
do you get the better construction loan with the most competitive pricing?
More significantly
what is a nice construction loan?
A typical construction loan nowadays is a construction to permanent loan that may or may not allow you to lock-in today's low interest rates until the home is completed. If you choose a loan that makes not allow you to lock in upfront, the interest rate may end up higher on
with your monthly payment.
The most important thing once
searching for a nice construction loan is to find an full-fledged construction loan specialist that knows which banks are the best.
The better banks can offer you a low rate now, upfront, before you start building your new home.
3. Should you go directly to your local bank or to a loan broker for your loan?
Most banks offer loans, and going to them is like buying at a Ford dealer. The only thing you can get at the Ford dealer is a Ford. But what if you want choices?
One way to get several choices is to go buying to every bank in town. Or you can call an full-fledged construction loan broker who has done all of the prep for you and has direct access to hundreds of banks nationwide.
A broker is a representative for hundreds of banks. Though the broker serves as middle-man, his or her services wish not cost you thing
extra. That's because brokers get loans at wholesale rates, and pass them on
to their clients at retail prices, just like any another business.
The difference between wholesale and retail is how brokers do money. Therefore, you get the same rate from a broker as if you went directly to the loaner yourself.
In Fact, because or their volume, galore brokers are able to offer their clients better deals than you can get by talking to the banks on you own.
With an full-fledged construction loan broker you can shop dozens of the most competitive banks nationwide, activity with wholesale evaluation and can negociate on rates and pricing.
4. Should you lock in your construction loan before you start building or let the interest rate float?
If the rates are heading upward, lock. If the rates are stable, relax. If the rates are headed downward, float.
Right now interest rates are at an all time low and can only go up in the near futurity so do sure your construction loan is barred into today's better interest rates with the ability to float downward.
Inexperienced loan officers wish offer their customers an alluring low adjustable rate during construction without an direct
lock-in and the client may end up having to lock into higher interest rates once
the home is completed.
Or the client is oversubscribed on a higher rate during construction with a float down option after the home is built. Again, the rate could be more higher once
the home is completed.
Meanwhile the loan officer has been paid and has affected on to the next loan. The only time you want this type of loan is if it’s the only loan you qualify for.
Most loan officers do not explain this to their customers until it's too late (Closing).
Always ask. Is the construction loan rate barred direct
or floating during the construction loan period? Then ask, is the rate during the construction loan the same rate once
the loan converts into the mortgage period.
5. What experience makes your construction loan officer have and makes it matter?
When it comes to money its amazing how fast any loan officer becomes an instant expert at construction loans. You must support in mind that all loan officers are salespeople. Yes, I cognize they have fancy titles like loan officer or vice president but the title is nothing but a fancy name for loan salesperson.
Loan salespeople normally have one main goal in mind once
portion you with your loan request and that is the commission. By the way, the fancy name for commission in the loan business is called a loan fee, points or yield spread premium (YSP).
Now don't get me wrong, there are a lot of nice honest sales folk (loan officers) that activity really hard at providing you the better service and rates. What’s important is distinctive the nice from the bad.
The following questions allow you to quickly find out if your loan officer is full-fledged at construction loans.
1. How long have you been doing construction loans? 5 years or more is best.
2. What is the loan to cost (LTC) required for construction loans? This is cash equity such as down payment on land. This can range from 5 to 20%.
3. What is better? The voucher or draw disbursement system and why? Draw is now the most popular because the client has the control of the money.
If the loan officer (sales person) can answer these questions with no problem then they have passed a pretty nice litmus test test.
If you actually want to throw a curve at them, ask the loan officer if they have ever built a home themselves and what type of construction loan did they get.
If you find a loan officer that has gone through the experience of building a home themselves then the odds are you have found an full-fledged loan officer.
6. Qualifying for your construction loan, exactly how is it done?
The 1st thing your loan officer wants to see is your completed loan application. The loan application called the (1003) wish tell a story of your fiscal picture.
The completed loan application wish tell the loan officer galore things including,
1. What type of loan you want.
2. How more money you need.
3. Your societal safety number.
4. Your current employers.
5. A list of all you assets (money) and liabilities (bills).
6. How more money you make.
7. How more real estate you own.
Once the loan officer has your loan application in hand they can determine whether you can qualify for a loan.
One of the 1st items force
is your credit report. The credit report is going to tell 3 main important things.
1. Show your current credit score. The credit score can range from 500 to 800.
2. Show a complete list of all your monthly liabilities (bills).
3. Show all past credit problems including bankruptcies, foreclosures and late payments.
With this information the loan officer wish do an analysis to determine if you can qualify for the loan figure that you’re looking for.
This analysis determines a magnitude relation called the (income to fiscal obligation ratio) and depending on the banks underwriting guidelines this magnitude relation wish normally range from 36% to 45%.
The financial gain
to fiscal obligation magnitude relation is the percentage of monthly fiscal obligation payments (including your new mortgage payment, taxes and insurance). This magnitude relation should not exceed 36% to 45% of your monthly income.
Some banks wish allow you to exceed this magnitude relation if you have an first-class credit history and first-class credit score.
The current and the most popular know-how
of qualifying for a loan now is the declared financial gain
loan.
Stated financial gain
allows you to qualify without collateral your financial gain
on your tax returns, W 2's or pay stubs. The only thing the bank verifies once
applying for a declared financial gain
loan is your credit score, liquid assets and that you're employed.
7. How not to be taken by the oldest trick in the book "Bait and Switch"?
The mortgage loaning business is ill-famed for harassment and switching.
Baiting and Switch is once
a loan officer or ad offers you one thing and then tries to sells you thing
else.
Typical signs of harassment and switch are obvious, several basic examples are:
1. Over the phone, you are offered a more lower rate than any another quote and once you've sent in your application the rate you were quoted has all of a abrupt vanished.
2. You are offered a construction loan with no points and no loan fee's. What you are not told is that you are paying for it with a higher interest rate and the cost are built into the loan.
3. You are told that you wish not have any payments piece you're building. What you're not told is that all construction loans have this option and it's called "interest reserves" and the payments are accessorial to the loan amount.
Remember three important facts and you wish always be in nice shape.
1. If it sounds too nice to be true there's normally a reason.
2. Always get your quote in writing, (ask for a nice faith estimate).
3. If you are satisfied with the rate and construction loan program that you are quoted, ask to lock it in upfront.
On the flipside, it is really important to realize that most loan products typically go hand in hand with banking guidelines. These guidelines are provided to loan officers to coincide with the customer's qualifications.
For example, if you have a really high (FICO) credit score with land free and clear, you have more loan options than the person with a really low (FICO) score and no land equity.
8. Now for the biggest private secret of all, ready? All banks have access to the same rates and the only reason everyone ends up with a several rate is directly related to how more your loan officer and bank is going to profit from you.
You should probably see that one again.
Your loan officer gets paid like all sales folk either by:
1. Wage plus commission
2. Commission only.
It doesn't matter if you walk directly into a bank or activity with a broker, fundamentally everyone gets paid the same.
If you walk directly into a bank the loan officer most likely gets a basic wage and a percentage of the loan origination fee (points and yield spread premiums). If you activity with a broker the broker normally works on a straight commission (points and yield spread premiums).
Becoming a broker allows the loan officer the ability to offer their customers the better loans with the most options.
It always amazes me once
I see TV commercials or hear radio commercials advertising $395, zero closing costs. I always wonder if folk understand how they can do that.
Ok, here is how it is done.
The inside private secret is that in exchange for these low or zero closing cost the lenders wish do their profits and cover the cost of the loan by charging you a higher interest rate.
This higher interest rate pays what they call in our industry a (YSP) yield spread premium.
By charging you a higher interest rate over the life of the loan the bank can easily afford the commercials, commissions, payroll, and cover the cost of the loan piece still devising a profit. Besides the service is normally really poor and impersonal.
So the next time you see advertising with no closing cost you wish cognize exactly how they are doing it.
So please remember that there is no such thing as a free lunch in any business. Business wouldn't be business if there were no profits. The most important thing is that you want the better loan accessible at a fair cost with an full-fledged loan officer.
9. What are interest reserves and contingency funds doing in your closing costs?
The two things most customers do not factor into the cost of the building their new home are interest reserves and contingency funds.
Interest reserves are accessorial to your loan figure to do the monthly payment on your loan. Yes, you see that correctly, you wish not have to do a monthly construction loan payment piece your home is being built.
The payments are ready-made from this interest reserve account and no, it’s not free. This reserve is accessorial to your construction loan amount.
Interest reserves were designed for the benefit of the customer. Most folk building a new home are either paying rent or have an existing mortgage payment piece their home is being built.
The last thing a client inevitably is another monthly payment piece building. So, banks created the interest reserve account by adding up the calculable
interest payments over a 12 month period and add this to the loan amount.
If you do not want interest reserves accessorial to your construction loan figure you can ask to do your own monthly construction loan payment.
Contingency funds are accessorial to the loan figure just in case you need more money to build your new home.
With all nice intentions construction loans tend to have cost over runs. The bank adds 5% to 10% of the cost breakdown and adds this figure to the loan figure just in case you have cost over runs or need better appliances.
If you don’t need or use this extra contingency fund then it wish not be accessorial to your mortgage upon completion of your new home.
So once
you apply for a construction loan ask your loan officer to provide you a copy of the calculable
construction loan budget.
The budget is created from your cost and includes every cost inside
the loan including land balances, closing costs, interest reserves, contingency and bank fees.
10. What is loan to value (LTV) and loan to cost (LTC)? Why it’s probably the most important factor in acquiring sanctioned for a construction loan besides your financial gain
and credit.
Initially most banks are concerned with loan to appraised value (LTV) but banks are actually more concerned with how more cash you have in the project (LTC).
If you were purchasing a home instead of building you would-be normally have to put 20% of the purchase cost as a down payment.
Since you’re building a home your cash equity normally comes in the form of how more cash you put down on your land.
Cash equity is king once
applying for a construction loan.
For example, if you bought a $200,000 piece of land and the land is closely-held free and clean you have a lot of cash equity.
With this more cash equity you wish most likely not have to bring in any additional cash.
Or if you bought a piece of land over 12 months ago for $100,000 and its now worth $200,000 the bank wish use the current value because you bought it over 12 months ago.
In several cases you have brought $200,000 cash equity to the table.
Now if you just bought a piece of land for $200,000 and you only put down $20,000 most banks wish want to see 10% to 20% cash into the total project.
Other qualifying cash equity that can be counted are any pre-paid’s such as plans, grading, permits etc. These pre-paid's can be used for cash equity or you can be reimbursed from the construction loan at closing.
11. Should you hire a builder or be an owner builder?
Do you actually want to be an owner-builder? The goal of being an owner builder is chiefly to save money. Several folk can save quite a bit of money if done correctly.
Some folk are not meant to be owner builder.
Possible problems once
acting as owner builder are:
1. Construction cost over runs.
2. The better banks with the better rates require a builder or supervisor.
3. Managing contractors to stop on time or to show up for work.
4. Depleting your personal savings.
5. The need to borrow more money.
6. Loan extension penalties.
7. Being taken by unscrupulous contractors.
8. The need to finance
your construction loan.
9. Foreclosure.
I could go on and on just about the horror stories I hear from Owner Builders that did not get a construction loan and acted as their owner builder.
If you have ne'er
built a home before and perfectly need to act as owner builder please take my proposal
and hire a esteemed builder to supervise you and the building of your new home, for a more smaller fee than their normal fee.
The builder/supervisor wish help you with the cost breakdown and manage the subcontracting on an as needful basis. If one of your contractors gets out of hand or you need help of any kind, you can call the supervisor for assistance.
Your job is to do sure you are hiring the right folk to complete your home. It can do the difference between happiness and misery.
For those of you that have experience at building homes but do not have a license ask just about our owner builder program. To qualify you wish need a resume showing your experience.
If you decide on hiring a builder to do everything do sure you hire a esteemed builder or supervisor with a nice reputation and plenty of references.
Ask your friends if they cognize a nice builder and once
you start to hear the same name over and over you cognize you've found a nice one. Ask the building inspector for a list of esteemed builders.
The most important point is shop about until you find a builder with the most esteemed and honest background.
If you pay a little more for an honest and esteemed builder or supervisor you wish be really grateful before, during and after your home is completed
12. How makes your builder determine how more your home wish cost to build?
The Calculable
Cost Breakdown of your home is probably one of the most important forms in the construction loan package. This is the breakdown of each particular cost of construction of the home. The foundation, lumber, framing, plumbing, heating, electrical, painting, and builder's profit, etc.
The builder normally completes this form to show you exactly what it wish cost to build your new home. The most important thing to remember here is that you do not want to underbid any line item and you do not want to overbid any line item. You want accurate amount from real bids (not guesses) and a 5% contingency for cost overruns.
Good builders wish send out the home plans to their contractors for specific bidding on each main item or can estimate the home themselves. The builder wish send one set of plans to the foundation contractor, one set of plans to the framer, one set of plans to the plumber, etc, etc.
When all the amount move in, the builder wish fill out the cost breakdown and move up with a total cost to build your new home.
Bad builders wish use the WAG know-how
of estimating the cost of building your new home. The WAG know-how
stands for "Wild Ass Guesses". This know-how
is the most dangerous since it can lead to under and over bidding.
The last know-how
of bidding is just to over inflate every single line item on the cost breakdown. This is the most profitable know-how
for the builder and the most big-ticket to the customer.
This is why you want to find an honest, esteemed builder with a nice reputation in your community. Once the cost breakdown is completed and you plan on hiring this builder to build you new home you wish need to type up a contract. The contract inevitably to equal the accessorial total of the cost breakdown.
Most builders wish provide the contract but do sure you see it cautiously and that you add your requirements as well. There are two types of contracts
1. Fixed Contract: This contract is simple and straightforward. Take the total of the cost breakdown and put that fixed number into the contract. The builder wish provide a list of responsibilities.
2. Cost plus Contract. This type of contract is normally for large construction loan projects.
A. The client wants to do a lot of changes to their home as its being built.
B. The construction loan period to build the home is 18 months so construction cost can change drastically. The builder prefers this contract to protect the cost and profits.
13. How makes your builder get paid piece your home is being built?
There are two methods that banks use to do sure your builder gets paid piece building your home.
The Voucher Compensation
system has been about for quite a while. As usual you'll have several builders that are really familiar with this know-how
of payment and do not like change.
Most builders are actually only concerned with how fast they can be paid and how often they can be paid.
Most banks find that the voucher system is just too more activity to deal with anymore. The builder is given a big book of vouchers that looks like a check book and once
they want to get paid or need to pay a contractor they need to fill out a voucher form. This voucher form is a request for payment and as long as the contractor has signed the lien release the bank wish pay the figure requested.
The bank wish besides request an review throughout the construction loan to do sure that the activity is completed.
The Draw Compensation
system is becoming the standard for construction loan funding for most banks.
The main difference is that the bank puts the accounting responsibility on you or your contractor. The bank uses your cost breakdown as the manual for the draws. Several banks use specific schedules of 4 to 7 draws based on completed construction milestones, such as foundation or framing.
The draw systems besides allow the select of taking draws on a monthly basis, collection partial payment for activity and material items that have been completed.
I in person
prefer the draw compensation
system because:
1. It requires less work.
2. Provides more control for several the client and the builder.
3. The funds are wired directly into your bank account.
3. It's easier to use than the voucher system.
4. Several banks now have online draw requests.
14. What type of construction loan insurance is required and who is required to get it?
The reality of construction loan insurance. There are three types of insurance needful to build. All banks require the 1st two insurances, course of construction and general liability. Workman's compensation is only required if your builder has employees.
1. Course of Construction Insurance. This policy is an all risk policy to include, fire, extended coverage, builder's risk, replacement cost, hooliganism and malicious mischief insurance coverage.
2. General Liability Insurance. You or your builder can provide this policy. This policy is a comprehensive general policy or a broad form liability endorsement. The minimum figure of $300,000 for each occurrence is required. If the builder provides the insurance a general policy of $1,000,000 or a broad form liability endorsement is required.
3. Workman's Compensation Insurance. If your builder owns his own institution and has employees that are portion to build your home, workman's compensation is required.
If the builder just subcontracts out the activity and makes not have employees per se, they wish need to write a letter acknowledging that they do not have employees and are not required to have WCI.
15. Has your loan officer structured your construction loan properly and why it's so important?
I get loans all the time from customers that went to another loaner or broker and were either turned down or were offered a below average construction loan.
The reason was because the loan was not structured properly before it was sent into the bank. Structuring a loan properly is just devising sure that you match the customer’s loan request to the banks underwriting guidelines.
Recently I received a construction loan request from a client that was turned down by a large national bank. The loan officer had calculated the financial gain
incorrectly and submitted the loan as full documentation.
The client closely-held his own business and had a lot of tax deductions on his tax returns. The way banks qualify customers as full documentation is really conservative and the loan was turned down.
We took the loan, found the problems direct
and submitted the loan as declared income.
The client was sanctioned and built a beautiful home in Rancho Santa Fe CA.
Structuring construction loans for approval is vitally important and is the last thing on most customers’ minds. Each and every time I obtain a loan from a client with a bad loan experience it is always because the loan officer did not specialize in construction loans and did not structure the loan accordingly.
Other common mis-structured loan scenarios include:
1. Low cash equity.
2. Improperly completed appraisal.
3. Unexplained credit derogatory.
4. Financial gain
incorrectly calculated.
5. Match of client loan request to the correct lender.
6. Plain and simple incompetence
The old expression “you get what you pay for” is especially true once
obtaining funding in building your new home.
Simply just about the author:
Rick Gomez specializes in construction loans in the state of California. You can transfer
a complete construction loan application package and a list of the better banks at http://www.californiaconstructionloans.com
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