Writer | Eric Burgoon
Your Loan Officer Should be Your First Call
If you are looking to build your dream home, it’s never too early to start working with a mortgage lender. Building a home can be a daunting task and there are many factors to consider, including selecting a builder, budget, location, materials and labor. While your lender will be crucial in financing the construction of your home, they can also be instrumental in all other aspects of the process.
You, your builder and your loan officer can become a very powerful team in the construction of your new home. Once you decide on the area where you want to live, you can begin narrowing your search for a specific lot. Builders are excellent sources of property and can often build for you on a specific site they may already own. You may also find your own land first and then select the builder. If you own land or purchase land first, several financial institutions offer a lot loan program, where you can finance up to 90% of the cost.
Your mortgage loan officer can be an invaluable resource when choosing your builder. Loan officers work closely with builders and developers in the local market and can provide you with a list of reputable builders as well as help you assess their experience, reputation and financial stability. Working with a builder whom your mortgage lender has an existing relationship with can also mean less paperwork and quicker approvals, leading to faster construction.
Determining your budget is an important step in building your dream home. It’s essential to consider all the costs associated with construction, including land purchase, permits, materials and labor. Your builder will help you budget and most experienced builders have a very well-defined process for selecting and modifying style, square footage, finishes and custom features. It may require tradeoffs, but your builder will help you design and build the home you desire while staying within your budget.
When it comes to financing, first-time builders have a couple of options. Some larger builders may be able to finance the construction of the home themselves and do not require you to finance the construction. The cost of that financing is built into the cost of construction and not detailed specifically, as your builder takes care of funding the entire construction of the home. When your home is completed, you simply close on your mortgage, similar to purchasing an existing home. This is commonly referred to as an end loan mortgage.
The other popular option is to obtain a construction mortgage. Many custom or smaller home builders prefer this option. A few of the advantages of this product are control, rate protection and lower closing costs.
A construction loan works a bit differently than an end loan. When work is completed by the builder, the builder requests a draw from your lender. The financial institution verifies through an appraiser that the work has been completed and then releases funds to the builder. This process allows you to approve each draw request — or simply the final one, if you prefer — ensuring that the work is being completed to the agreed-upon specifications. Your interest rate and loan approval are set before construction even begins. This guarantees your rate for the life of the mortgage and — because you only close one time — your costs are lower. You do pay interest on the amount of funds actually being used, so this is a cost in addition to your current home mortgage or rent and one not required for the end loan.
Your loan officer can help you determine whether an end loan or construction mortgage is best for you. Depending on your personal situation and the builder you select, your loan officer may recommend one type of financing over another. This is where an experienced loan officer can really help you in the construction of your dream home. Selecting the right builder and right financing method up front can lead the way to a very smooth and enjoyable adventure toward your new home.