So you have found multiple banks, brokers, consultants, etc that are giving you offers on a construction loan.  Today, folks just like you have followed television reports and online blogs.  You know that most banks don’t tell you everything until it is too late.  You have to force them into telling you what you need to know.  This can only be done if you know the right questions to ask.

THE MOST IMPORTANT RULE OF THUMB ON COMPARING OFFERS IS THE ABILITY TO OBTAIN AND REVIEW OFFERS ON THE SAME DAY.

WHY DO WE RECOMMEND NOT WASTING TIME OBTAINING AND REVIEWING COMPETING OFFERS FROM VARIOUS BANKS ON DIFFERENT DAYS?

1. Inefficient.  Here is a list of things that change very frequently.  Unfortunately, when a customer calls back, the originator typically forgets to acknowledge or overlooks the fact that something has changed.  This leads to a long process that is a road to nowhere.  Wasting time while rates and construction costs increase.

1. Bank terms and programs change daily
2. Rates
3. Costs
4. Down payment requirements
5. Appraisal/property type requirements
6. Underwriting/approval guidelines

2. Ineffective

• The banks are not actually competing if you merely request information without “showing them your cards”
• Even when you get them to compete by revealing another offer, they will only meet or beat offers made on the same day

SO NOW YOU HAVE 10 (preferably more) COMPETING OFFERS FROM DIFFERENT BANKS ON THE SAME DAY.  NOW WHAT DO YOU DO WITH THEM?

1. Well, we have decades of experience dedicated to construction financing.  We know it is a lot easier for us because of that reason.  So we thought we would share some of the things to look for to help you:

• Understanding the rates

1. First, you must understand the type of loan that is being offered to you.  Which of the following are they offering you?
1. One time close
2. Two time close
3. Construction only
2. Next, you must identify the following:
1. Rate during construction
2. Rate for the permanent mortgage
3. Advanced rate lock for end loan
4. Float down option

• Understanding the costs

1. One time close loans
1. What are the banks standard fees for making a mortgage loan?
1. Underwriting
2. Processing
3. Credit report
4. Appraisal
2. Are there any origination fees?
3. Are there any discount points/fees?
4. Are there any fees charged specifically for a construction related loan
1. Draw fees
2. Construction admin fees

• Understanding the allowable construction phase

1. What is the maximum number of months permitted to build?
2. What happens if you go over the maximum permitted months to build?
1. Do you pay a penalty
2. Can you extend the construction term
1. if so, what are fees
2. what happens to perm rate if it was already locked
1. Does it expire?
2. How many points will you pay to extend?

• Understanding if you might actually qualify or if you are wasting your time
  1. What percentage of construction applicants are actually obtaining loans?
  1. This is the most important question in today’s market.  It is also the question that banks want to dodge the most.  Many banks offer wonderful terms.  However, most folks can not afford to flip a coin if any one bank is closing less than 50% of its applicants.  If they don’t know this percentage…that is most likely a huge red flag.  You need a bank that can be upbeat and confident about closing construction loans and not just dangling offers.  Don’t fall for “I never heard that question”, “A lot of folks aren’t qualifying but you should be fine”, “I’m not sure about that but it will not matter with you”.
  2. Some appraisal requirements (sorry, there are too many to list them all)
  1. If your property is in a Declining Market
  1. Some banks will not even do them if the area is known as declining.
  2. If your loan will require PMI, most banks can not get the mortgage insurance so they can not do the loan or they have to increase your down payment significantly.
  3. Banks that will consider these loans may have to reduce their maximum loan to value.  This could impact your rate and/or your approval.
  2. Location
  1. Rural
  3. Age of comparable home sales
  1. Requiring less than 6 months is a red flag.  Should allow up to 1 year.  More time when dealing with unique properties, areas or situations.
  4. Mileage of comparable home sales
  1. Requiring comps to be within 1 mile or less on a suburban property is a huge red flag.  Requiring comps within 10 miles on rural homes is also a major concern.  Banks that are favorable to rural homes allow more than 10 miles.
  5. Style of home
  1. Log home
  1. Most banks will not even do them
  2. Most banks will require the use of log home sales as comparables.  This is almost impossible to do in most areas.
  2. Modular home
  1. Most banks will require the use of modular home sales as comparables.  This is almost impossible thing to do in most area

If it is a Two Time Close or Construction Only loan, is another qualification required?  If so, do you have re-qualify when construction is over?  If so, be careful.  This market changes too quickly to count on permanent loans to be available when a home is complete.  If they aren’t then you likely face a legal fight with the construction lender or extremely unsavory financial terms to carry permanent financing with them.