When beginning work on your construction job, there’s work that needs to be done before you even break ground. Financing, to be precise. Who you choose for that job can ultimately change the course of the job itself. The right bank can make the whole process seamless, transparent, and as easy as it can possibly be.
You’ve got the money in hand for the loan amount, a detailed job proposal, and an idea of what you’re looking for in a financing partner. You even know what kinds of loan options you’re in the market for. What else could you possibly need?
The best way to determine if a bank is right for you is by asking the right questions. A financial institution's response to in-depth research and these probing questions will tell you all you need to know. Especially when it comes to home construction loans, you want the best possible financial partner to see it through to the end.
Questions Designed To Find Your Ideal Banking Partner
1- DOES THE BANK OFFER CONSTRUCTION LOANS AS AN ADDITIONAL ITEM TO BE FULL SERVICE OR IS THIS A PASSION FOR THE BANK?
You need it to be a passion to ensure the best options for your family. Construction loan lenders need to have a shared passion for your vision and the project, it will motivate them to level any obstacles that arise during the lifespan of the loan until construction is complete. Their ability to cover the cost of the loan isn’t in question - it’s their conviction that is.
Once you have the answer, decide whether or not to proceed. Two of the worst things you can do is proceed if you think something is not right, or proceed as if something is wrong when nothing is.
2- Does the bank have appraisers that have experience with custom homes on lots or land?
The answer to this question is imperative. Unless you have an experienced appraiser yourself, the bank’s relationship with a licensed appraiser will save you a lot of hassle. Worse yet, if you select a bank with an inexperienced appraiser, you are practically guaranteed a lower appraisal value or a delayed appraisal time frame. Your loan officer can offer you all types of construction loans but it won’t matter if you are denied access to an experienced appraiser.
3- What are the areas the bank is able to lend?
This is key because banks often have limits to how much money in any one area they are willing to lend on custom homes at a given time. You want to know this limitation as early as possible so you’re not wasting time spinning your wheels with a bank who can’t offer you what you need. This can result in a qualified buyer being denied.
4- What type of construction loans does the bank do?
There are different types of one-time close and traditional construction loans. Do they support FHA, VA and other government-assistance based loans? It’s important to know their offerings, the scope of those loans, and their expectations of you when it comes to each loan.
Follow all that up with a question asking about all the different fees if the client does the one-time close. From there you can find out which ones may work best given your options:
- Construction-Only Loan: This type of loan only covers the cost of the construction, not an additional mortgage. If you’re doing all of the work yourself, this can be a costly option because you end up paying multiple sets of fees and potentially higher interest rates.
- Construction to Permanent Loan: A loan designed to oversee the construction of a home and be converted into a permanent mortgage once the home is complete.
- Home Equity Loan: This relies on the value of your home to generate the loan, using the home itself as collateral. This produces a lump-sum payment that you pay back at a fixed rate over an agreed-upon period of time.
- Term loans: This is a by-the-book loan that has its term spelled out, customized very little. The repayment schedule and fee schedule are laid out and the interest rate can be either fixed or floating depending on the terms.
5- Does the bank have a loan committee that has a passion for construction loans or are they conservative to approve them?
You can ask about their loan approval rate, how extensive the loan process is, and if this is a project they would normally approve. By finding out how many similar loans they approve a year, for example, you can determine how likely they are to grant your loan application.
6- Are they able to follow the draw schedule the builder has in their contract?
This may be a better conversation for the builder to have with the bank, but always a good question to get an idea of whether their system is flexible or rigid.
7- How long does the client have to pay off the construction loan?
This is an important question to ask and help you narrow down potential loans. Depending on the terms of the loans, shorter loans may require higher interest payments that may not be worth it for you. You want to be aware of the timeline of the loan, if you’re expected to make interest only payments, and other fine details when deciding on a loan.
8- If build time exceeds the given time for the construction loan, what options does the bank have to extend the loan?
Construction time tables are never convenient for anyone. Even with the best construction crews and technicians on your side, you could run behind. They could enforce additional penalties, higher rates on the extended period of time, or that they may not grant you an extension at all. Knowing the ramifications ahead of time will help you make a more informed decision.
9- Does the bank allow bridge loans?
Or have options for the client to use their equity in their current home to help with the down payment? The transition from temporary to long-term financing can be just as important as the loan itself if time is of the essence and you need to secure a loan fast.
Now You Know
Now that you know some of the best questions to ask, you’re more informed than ever before. Armed with these answers, you’ll have some concrete answers to refer to when narrowing down your financial partners for your construction loan and get you even closer to completing your home project. Utilize these questions and the answers a bank provides to find the bank that fits your construction loan needs!