By: Rick Gomez
1. Which construction loans are available and that we should ask?
bank home loan and the Internet has changed the mortgage lending or construction forever. Today's choices include construction loan in year 30, the 15-year fixed rate, 1 year ARM 1.3 ARM 5 / 1 ARM 7 / 1 ARM 10 / 1 ARM and do not forget popular interest-free loans only.
The construction loan of the past was a short term 1 year loan that the customer would have to refinance into a new loan once construction was completed.
The two-time cost of customers two types of closing costs and you would have to requalify for the new loan once the house was completed.
The construction loan the most popular today is the "One Time Close" but not all are created equal. Like any product there are the best loans, good loans and downright bad loans.
With today's technology, you now have the opportunity to obtain a construction loan of the best banks in the country and sign your loan documents to title company or escrow office . This service allows you to have the construction loan at the most competitive market.
The loan you should ask is simple: ask the lowest rate, closing once for a specific period of time you think you are going to live there.
2. Which lenders / banks have better construction loans and what you need to apply?
There are plenty of banks willing to lend money for mortgages, refinancing, home equity loans and any other type of loan. But if you intend to build a new house, where do you get the best construction loan with the most competitive prices?
More importantly, what is a loan to build good?
A typical construction loan is now a construction permanent loan that may or may not allow you to lock in current interest rates low until the house is completed. If you choose a loan that does not allow you to block the outset, the higher interest rates may end up with your monthly payment.
The most important thing when looking for a construction loan is good to find a construction specialist experienced loan knows that banks are the best.
The best banks can offer you a low rate right now, from the outset, before you start building your new home.
3. If you go directly to your local bank or a loan broker for your loan?
Most banks offer loans, and going to like shopping at a Ford dealer. The only thing you can get at Ford is a Ford. But what if you want choice?
One way to get different choices for shopping in all the banks in town. Or you can call a broker experienced in construction lending which has all the homework for you and has direct access to hundreds of banks.
A broker is a representative of hundreds of banks. Although the broker serves as a means of man, his services will not cost you anything extra. That's because brokers get loans at wholesale rates and pass them on to their customers at retail prices, just like any other business.
The difference between wholesale and retail is how brokers make money. Therefore, you get the same rate as a broker if you went directly to the lender yourself.
In fact, because of or in volume, many brokers are able to offer their customers better deals you can get by talking with the banks on your own.
With a loan broker construction had buy dozens of the most competitive banks nationwide, work with wholesale pricing and can negotiate rates and prices.
4. If you block your construction loan before you start building or float the interest rate?
If rates are heading upward, lock. If rates are stable, relax. If rates are headed downward, float.
Currently interest rates are at an all time low and can only go in the near future so make sure your construction loan is locked in interest rates today with the ability to float downward.
Inexperienced loan officers to offer their customers an enticing low adjustable rate during construction without advance lock-in and the client may end up having to lock in higher interest rates when the home is completed.
Or the customer is sold at a higher rate during the construction of a float option after the house is built. Again, the rate could be much higher when the house is completed.
Meanwhile the loan officer was paid and spent the next loan. The only time you want this type of loan is whether it is the loan you qualify.
Most loan officers do not tell their customers until it is too late (Closing).
Always ask. The rate of construction loan locked at the outset or floating during the construction loan? Then ask, is the loan rate during the construction at the same rate when the loan becomes a mortgage loan period.
5. What experience does your loan officer to build and he matter?
When it comes to money its amazing how fast any loan officer becomes an instant expert construction loans. You should keep in mind that all loan officers are salespeople. Yes, I know they have fancy titles like loan officer or vice president but the title is nothing but a fancy name for vendor loan.
vendors typically have a loan principal objective in mind when helping you with your loan application and that is the commission. Incidentally, the fancy name for the Commission in the lending industry is called a loan fee, points or yield spread premium (YSP).
Now do not get me wrong, there are many good honest sellers (loan officers) who work very hard to provide you the best service and rates. What is important is to distinguish good from bad.
The following questions allow you to quickly determine if your loan officer is experienced at construction loan.
1. How long have you ready to build? 5 years or more is preferable.
2. What is the loan to cost (LTC) for construction loans? This is cash equity as a deposit on earth. This can range from 5 to 20%.
3. Which is better? The good or draw disbursement system and why? Draw is now the most popular because the customer has control of the money.
If the loan officer (seller) can answer these questions without problem then they had a pretty good litmus test.
If you really want to throw a curve to them, ask the loan officer if they have already built a home themselves and what type of construction loan did they get.
If you find a loan officer who has lived the experience of building a home themselves then the chances are that you have found an experienced loan officer.
6. Qualifying for your construction loan, exactly how is it done?
The first thing that your loan officer wants is your credit application. The loan application called (1003) tell a story of your financial situation.
The credit application will tell the loan officer, including a lot of things,
1. What type of loan you want.
2. How much money you need.
3. Your Social Security number.
4. Your current employer.
5. A list of all property that you (the money) and liabilities (bills).
6. How much money you make.
7. How much real estate you own.
Once the loan officer has your loan application in hand, they can determine if you qualify for a loan.
A first point is taken from your credit report. The credit report will tell 3 main important things.
1. Show your current credit score. The credit rating can vary from 500 to 800.
2. View a complete list of all your monthly debts (bills).
3. View all credit problems in the past including bankruptcies, foreclosures and late payments.
With this information, the loan officer will make an analysis to determine whether you can qualify for the loan you need.
This analysis determines a ratio called the (income to debt ratio) and depending on the underwriting banks guidelines this ratio ranged from 36% to 45%.
Income debt ratio is the percentage of monthly payments (including your mortgage payment, taxes and insurance). This ratio should not exceed 36% to 45% of your monthly income.
Some banks allow you to exceed this ratio if you have a credit history and excellent credit rating excellent.
The current and most popular method of qualifying for a loan today is the stated income loan.
stated income allows you to benefit without checking your income on your tax return, O 2 or pay stubs. The only thing the bank verifies whether a stated income loan application is your credit score, cash, and that you are employed.
7. How not to be taken by the oldest trick in the book "Bait and Switch"?
The mortgage lending business is notorious for baiting and switching.
Baiting and Switching is when a loan officer or advertisement offers you one thing and trying to sell you something else.
Typical signs of baiting and switching are obvious, some basic examples are:
1. On the phone, it offers a much lower rate than any other equipment and once you have sent your application the rate you were quoted has suddenly disappeared.
2. You are offered a construction loan with no points and no cost loan. What you do not tell us is that you pay for it with higher interest rates and costs are built into the loan.
3. You said you will not have any payments while you build. What you do not tell us is that all construction loans of this option and it is called "interest reserves" and the payments are added to the loan amount.
Remember three important facts and you'll always be in good shape.
1. If it sounds too good to be true there is usually a reason.
2. Always get a written estimate, (ask for an estimate in good faith).
3. If you are satisfied with the speed and the program of construction loan you are quoted, ask to lock up.
Conversely, it is very 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 qualifications of the customer.
For example, if you have a high credit score (FICO) with the land free and clear, you have more loan options than the person with a very low (FICO) score and no land equity.
8. Now for the biggest secret of all, ready?
All banks have access to the same rate and the only reason everyone ends up with a different rate is directly related to how much your loan officer and the bank will take advantage of you.
You should probably read that again.
Your loan officer is paid like all sales people either:
1. Salary plus commission
2. Commission only.
It does not matter if you walk directly into a bank or broker to work with, everyone is basically the same salary.
If you walk directly into a bank loan officer most likely gets a basic salary and a percentage of the loan origination fee (points and yield spread premiums). If you work with a broker the broker usually works on commission (points and yield spread premiums).
Becoming a broker allows the loan officer can offer their customers the best loans with the most options.
It always amazes me when I see TV commercials or hear radio commercials advertising $ 395, zero closing costs. I always wonder if people understand how they can do.
Ok, here's how it is done.
The secret is that the interior in exchange for these low or zero closing costs, lenders make their profits and cover the costs of the loan by charging you an interest rate.
This higher interest rate pays what is known in our industry a premium (YSP) yield spread.
By charging a higher interest rate on the loan, the bank can easily afford the commercials, commissions, salaries, and cover the cost of borrowing while making a profit. Moreover, the service is generally very poor and impersonal.
So next time you see advertising without closing costs, you'll know exactly how they do.
So please remember that there is no such thing as a free lunch in any business. Company would not be undertaken if there were no profits. The most important thing is that you want the best loan available at a fair price with a loan officer experienced.
9. What are interest reserves and contingency funds to make the closing costs?
The two things most customers do not take into account the cost of building their new home are interest reserves and contingency funds.
Reserves of interest are added to the amount of your loan to make the monthly payment on your loan. Yes, you read correctly, you will not have to make a monthly payment of construction loan while your house is built.
Payments are made from this reserve account the interest and no, it is not free. This reserve is added to the amount of your construction loan.
interest reserves were designed to benefit the customer. Most people who build a new home are either paying rent or mortgage payment while their existing home is built.
The last thing a customer needs is another monthly payment while building. So, banks created the reserve account the interest by adding estimated interest payments over a period of 12 months and add them to the loan amount.
If you do not want interest reserves added to the amount of your construction loan, you can apply to have your own monthly payment of the construction loan.
provident funds are added to the loan amount in case you need more money to build your new home.
All loans with good intentions tend to cost more than short. The bank adds 5% to 10% of the cost breakdown and adds this amount to the loan amount in case you have cost shortest or need better appliances.
If you do not need to use this extra contingency fund then it will not be added to your mortgage at the end of your new home.
So when you apply for a construction loan ask your loan officer to provide you with a copy of the estimated budget for the construction loan.
The budget is created from your costs and includes all costs within 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 is probably the most important factor in approving a construction loan besides your income and credit.
Initially most banks are concerned with a loan to the appraised value (LTV) but banks are really more concerned with how much money you have in the project (LTC).
If you buy a house instead of building you would normally put 20% of the purchase price as deposit.
Since you are building a house of your down payment is usually in the form of how much money you put on your property.
Cash is king of fairness in applying for a construction loan.
For example, if you bought a $ 200,000 piece of land and the land is owned free and clear that you have lots of cash equities.
With this much down payment you will probably not bring in any additional cash.
Or if you bought a piece of land over 12 months for $ 100,000 and now worth $ 200,000 the bank will use the current value because you bought more than 12 months.
In both cases you have brought $ 200,000 cash equity to the table.
Now if you just buy a piece of land for $ 200,000 and you pay only $ 20,000 most banks will want to see 10% to 20% in cash throughout the project.
Other qualifying cash equity that can be counted are the pre-paid, such as plans, grading, permits, etc. of these pre-paid can be used for cash equity or you can be reimbursed from the loan construction to closure.
11. If you hire a contractor or owner builder?
Do you really want to be an owner-builder? The goal to be a owner builder is mainly to save money. Some people can save some money if done correctly.
Some people are not meant to be owner builder.
Possible problems when acting as owner builder are:
1. Shorter construction cost.
2. The best banks with the best rates require a builder or supervisor.
3. Management contractors to finish on time or reporting to work.
4. Depleting your personal savings.
5. The need to borrow more money.
6. Loan extension penalties.
7. Taken by unscrupulous contractors.
8. The need to refinance your construction loan.
9. Foreclosure.
I could go on and on about the horror stories I hear from proprietary vendors who have not obtained a construction loan and acted as their owner builder.
If you have never built a home before and absolutely need to act as owner builder please take my advice and hire a reputable builder to supervise you and building your new home, for a price much smaller than their normal rates.
The builder / supervisor will help the breakdown of costs and manage the subcontracting on an as needed. If one of your contractors gets out of hand or if you need assistance of any kind, you can call the supervisor for help.
Your job is to make sure you hire the right people to complement your home. It can mean the difference between happiness and misery.
For those of you who have experience in building houses, but failed to ask about our owner builder program. To qualify, you'll need a resume showing your experience.
If you decide to hire a contractor to make sure everything you use a reputable builder or higher with a good reputation and many references.
Ask your friends if they know a good builder and when you start hearing the same name several times you know you've found a good one. Ask the building inspector for a list of reputable builders.
The most important thing is the store until you find a builder with the background of the most reputable and honest.
If you pay a little more for a manufacturer honest and reputable or supervisor will be very thankful before, during and after your home is completed
12. How does your builder to determine how much your house cost to build?
The estimated cost of Troubleshooting Your house is probably one of the most important in the construction loan package. This is the allocation of costs for each specific construction of the house. The foundation, lumber, carpentry, plumbing, heating, electricity, painting, and profits of the manufacturer, etc.
The builder usually completes this form to show you exactly what it will cost to build your new home. The most important thing to remember here is that you do not want to compete any item online and you do not want to outdo each line. You want specific numbers from real bids (not guesses) and a contingency of 5% for cost overruns.
Good manufacturers will send the plans of the house of their sub-contractors for specific bidding on each major component or can estimate the home themselves. The manufacturer sends a series of plans to the contractor foundation, a series of plans to the framer, one set of plans for the plumber, etc, etc.
When all the numbers come from, the manufacturer of the complete breakdown of costs and offer a total cost to build your new home.
Bad builders will use the WAG method of estimating the cost of building your new home. The WAG method stands for "wild ass guess." This method is most dangerous because it may lead to under and over bidding.
The last method of bidding is simply to over inflate every single line item cost breakdown. This is the most profitable for the manufacturer and the most expensive to the customer.
That's why you want to find an honest, reputable builder with a good reputation in your community. Once the cost breakdown is completed and you intend to hire this builder to build your new home, you must enter a contract. The contract must be equal to the amount added to the cost breakdown.
Most manufacturers will provide the contract but make sure you read it carefully and you add to your needs as well. There are two types of contracts
1. Fixed contract: This contract is simple and straightforward. Take the total cost breakdown and put that number specified in the contract. The manufacturer shall provide a list of responsibilities.
2. Cost plus contract. This type of contract is generally large projects ready for construction.
A. The client wants to make many changes to their home as being built.
B. The period of construction loan to build the house is 18 months if construction costs can change dramatically. The builder prefers this contract to protect the costs and benefits.
13. How does your builder get paid while your home is built?
There are two methods that banks use to ensure that your builder is paid while building your home.
The reimbursement system has been good around for a while. As usual you will have manufacturers who are very familiar with this mode of payment and do not like change.
Most of the manufacturers are really affected by how fast they can be paid and how often they can be paid.
Most banks find that the voucher system is simply too much paperwork to handle more. The constructor is given a big book of vouchers that resembles a checkbook and when they want to get paid or need to pay a contractor they need to complete a good. This form is a coupon payment request and as long as the contractor has signed the statement of lien, the bank pays the amount requested.
The bank will also request an inspection on the construction loan to ensure that the work is completed.
The draw reimbursement system is becoming the standard for financing construction loans 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 a guide for prints. Some banks use specific programs from April to July draws as construction stages completed, as the foundation or framing.
The systems also make the choice of taking draws on a monthly basis, collecting partial payment for work items and materials that have been completed.
Personally, I prefer the draw reimbursement system because:
1. It requires less work.
2. Provides control over the customer and the manufacturer.
3. The funds are wired directly into your bank account.
3. It is easier to use than the voucher system.
4. Some banks now have online draw requests.
14. What type of construction loan insurance is required and is necessary for it?
The reality of construction loan insurance. There are three types of insurance needed for construction. All banks require the first two insurances, course of construction and general liability. Workers Compensation is required if your builder has employees.
1. Course of construction insurance. This policy is a policy to include all risk, fire, extended coverage, builder's risk, replacement cost, vandalism and malicious mischief insurance.
2. General liability insurance. You or your builder can provide this policy. This policy is a comprehensive general or broad form liability endorsement. The minimum amount of $ 300,000 for each occurrence is required. If the manufacturer provides assurance of a general policy of $ 1,000,000 or a broad form liability endorsement is required.
3. Workers Compensation Insurance. If your builder owns his own company and has employees who help build your home, workplace accident is required.
If the builder sub-contracting work and simply did not have employees per se, they need to write a letter acknowledging that they have no employees and are not required to have WCI .
15. Your loan officer structured your construction loan properly and why it is so important?
I get ready at all times with clients who went to another lender or broker and were either refused or were offered a construction loan of less than average.
The reason is because the loan was not structured properly before it is sent to the bank. Structuring of a loan is simply to ensure that you meet the customer's loan application guidelines for the underwriting banks.
I recently received a loan to build a client that was rejected by a large national bank. The loan officer had incorrectly calculated the income and submitted the loan as full documentation.
The client owns their own business and had a lot of tax deductions on their tax returns. The way banks qualify customers as full documentation is very conservative and the loan was denied.
We took the loan, found the problems ahead and submitted the loan as stated income.
The customer has been approved and built a beautiful home in Rancho Santa Fe CA.
loans to build infrastructure for the approval is vitally important and is the last thing on the minds of most customers. Whenever I get a loan from a customer with an experience of bad debts, he is always ready because the officer did not specialize in construction loans and did not structure the loan accordingly .
Other common scenarios poorly structured loan:
1. Low downpayment.
2. Improperly completed evaluation.
3. Unexplained credit derogatory.
4. The income calculated incorrectly.
5. Incompatibility of the application of customer loans the lender correct.
6. sheer incompetence
The old adage "you get what you pay for" is especially true when obtaining financing in building your new home.
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