Finding the right banker to do the construction loan for a custom home on your land is one of the most difficult and intimidating pieces of the build-on-your-land puzzle. Shopping for a bank is difficult because it's tough to know what to shop for.
Unfortunately, because we don't know what qualifies a bank as a good fit for our unique situation, we often revert to comparing rates. There's so much more to it than that, and I've seen many people get burned by a construction loan bank that wasn't a good fit.
The Right Question for Your Banker
When it comes to determining whether a bank will be a good fit, here's the one question I recommend asking:
"Without naming names, can you tell me about the last construction loan you did for someone whose situation was similar to mine? Similar location, land type, house type and size, and budget?"
It's a complex question. You'll have to provide the details of what you're wanting to do, but it will be worth it to see how the banker responds.
Why does the banker's experience with similar projects matter? Simple. Every project is unique. Your project is the manifestation of your unique dream—a unique combination of needs, wants, problems, and solutions. Every home we build is different, each one with its own challenges to overcome.
You want a banker that's going to work to solve challenges that are particular to you and your home, not one who's going to apply some mass-market formula that might or might not work for you.
The Banker's Answers Tell All
If they tell you that the loan process is the same regardless of location, land type, and budget, that's a red flag.
But if they tell you a story of someone who encountered a few challenges and how they worked to solve those challenges, they might be a good banker for you.
A Real Life Example
We recently worked with a family who came to us after nearly committing to another builder. They'd already applied for a loan with a certain bank known for doing construction loans. We worked closely with that bank and provided detailed drawings and specifications about the client's land.
The land is in an older and established rural community, and the comparable homes were older. Their new home would have many features, amenities, and energy efficient components that the older homes lacked, which would make it more valuable than those older homes had been when they were new. Plus, the family had recently purchased the land at current market value.
Unfortunately, the bank had its own tried-and-true formula for your run-of-the-mill subdivision homes. They really had no experience with or any idea how to handle the more rural property we were dealing with. As a result, their pool of appraisers didn't know how to properly value the home, and they guessed low to cover themselves.
The bank had a high-volume, quick-turn mentality and wasn't particularly interested in solving this family's unique problem, so it simply said "no." Ultimately, the story had a happy ending when the family got connected to a bank that is used to doing construction loans for custom homes in rural communities.
The new bank understood the unique value of the property and the unique value of clients who have a dream to live on their own land in a custom home that meets their unique needs. People like that are low risk for a bank because they're typically the more conservative, responsible folks who live well within their means and don't default on bank loans.
The right bank will understand the value of not only the property and the house to be built, but also of the client whose dream they are helping come true.