Show me the money: Tips for financing your building project
Fourth in our series of articles discussing your team of professionals (architect, builder, etc.), here's some advice on selecting a financial institution to assist with financing your home building or remodeling project – often times the largest financial decision you'll make.
The best way to start is by being referred to two or three lenders by people you know and trust that have already had positive experiences with the individuals. Do a preliminary phone interview with each. The person you choose should be knowledgeable and able to clearly explain loan information and the entire process. It's important that you have an understanding of the various mortgage products and why a particular one is recommended and the associated interest rate and closing costs. A good lender is more than willing to be forthcoming with the answers.
After collecting preliminary information by phone, you should meet with the lenders in their office. See this as a relationship rather than a transaction. Rely on your instinct about the feelings you get about the lender. They need to build your trust. You need to feel confident in their ability to guide you through the process and meet your objectives.
As you know, questions will arise throughout the loan process, the construction phase and closings, and occasionally throughout the life of the mortgage. So, I can't stress enough the importance of selecting a local lender; the notion being that they're always available.
Consider where your mortgage will go for servicing after the closing. Some mortgages are locally-serviced, others are transferred. Ask your lender to explain how this impacts you. Local servicing gives you the ability to continue the face-to-face contact with your lender to assist you in managing your mortgage debt when needs arise. A local lender is also convenient when you want to later refinance to a lower rate or other program. Transferred servicing means your mortgage debt is managed by a lender other than the original lender. Every mortgage contains the possibility of transferred servicing.
Mortgage money is still available for single-family residential owner occupied and second homes. (Why wouldn't it be…we just "loaned" the financial industry $700 billion.) However, other types of properties and ownership are more difficult to finance now. The media tends to overstate that mortgage funds are hard to get.
We have seen some more restrictive underwriting guidelines for some loan programs, but overall mortgage financing has not changed dramatically.
Documentation is the order of the day. Stated income/deposit programs are gone. Lenders need to see W-2s or tax returns, bank statements and pay stubs.
Good credit scores are more important now than ever. Risk-based pricing is now the norm for conventional financing. The lower your credit score, the higher your interest rate.
FNMA & FHLMC are now government-owned and operated, but the transition up until now has been seamless. Both entities are funding the loans when they meet the investment quality guidelines that have been established long ago.
Lender reputation and stability are key ingredients. Don't hesitate to learn of the lender's solvency.
To save you money, ask the lender to waive inspection fees. Also, verify how many draws can be made against the loan. Usually, builders will do monthly draws. Multiply this times the number of months the project is expected to take and this tells you how many draws you will need. Moreover, look for construction loan one-time closing which means:
– No additional closing costs upon
completion of home; loan is
converted to permanent loan
– No interest rate risk during
construction phase, rate is locked
at beginning of construction and
remains the same for permanent loan.
Many thanks to the following individuals for their sage advice and time in assisting with this article: Bruce DeBoer at Fifth Third Bank, Bruce.DeBoer@53.com, Teri Damman at Northwestern Bank, TDamman@NWBank.com, and Gail Chambers at Traverse City State Bank, firstname.lastname@example.org.
Have a question or comment for "Ask the Builder?" Email Mike Ferraro at email@example.com.
Mike Ferraro is president of Ferraro Builders and past president of the Home Builders Association of Grand Traverse Area. Ferraro Builders is a full-service design and build firm and Certified Green Builder and Energy Star Partner specializing in Custom, Luxury and Timber Frame Homes, and Remodeling.