Finding the right construction loan officer and lender is crucial for a successful construction project. Your choice will impact not only the terms and conditions of the loan but also the overall progress of your project. This comprehensive guide outlines the key features to look for and questions to ask when searching for a construction loan officer and lender.
1. Construction Term
The construction term is the length of time you have to complete your project before the loan converts to a permanent mortgage. This period usually ranges from 6 to 18 months, depending on the complexity and scale of the project. It is essential to choose a lender that offers a construction term that aligns with your project timeline.
Questions to ask:
– What is the length of the construction term you offer?
– Can the construction term be extended if necessary?
2. One-Time Close vs. Two-Time Close Loans
Construction loans can be classified into two categories: one-time close loans and two-time close loans. One-time close loans combine the construction loan and permanent mortgage into a single loan, simplifying the loan process and reducing closing costs. Two-time close loans require separate loans for the construction phase and the permanent mortgage, with two separate closing processes and associated costs.
Questions to ask:
– Do you offer one-time close loans, two-time close loans, or both?
– What are the closing costs associated with each option?
3. Loan-to-Future Value (LTFV) vs. Loan-to-Cost (LTC)
LTFV and LTC are two methods that lenders use to determine the maximum loan amount for your project. LTFV is based on the appraised value of the completed project, while LTC is based on the total cost of the project, including land, materials, and labor. Understanding which method your lender uses can help you estimate the loan amount you may be eligible for.
Questions to ask:
– Do you base your loan amount on LTFV or LTC?
– What percentage of LTFV or LTC do you finance?
4. Option to Receive an Upfront Draw for Preorder Items
Some lenders offer the option to receive an upfront draw to cover the cost of preorder items, such as windows, appliances, or millwork. This feature can help you avoid project delays due to long lead times for materials.
Questions to ask:
– Do you offer upfront draws for preorder items?
– What is the maximum amount you can provide for upfront draws?
5. Maximum Debt-to-Income (DTI) Allowance
The DTI ratio is a measure of your monthly debt payments compared to your monthly income. Lenders use this ratio to determine your ability to repay the loan. A lower DTI ratio is generally more favorable, but the maximum DTI allowance varies between lenders.
Questions to ask:
– What is your maximum DTI allowance for construction loans?
– Are there any exceptions or flexibility in your DTI requirements?
6. Departing Residence Rules
If you plan to move out of your current residence before your new home is complete, it’s crucial to understand how your lender handles the departing residence mortgage payment in the DTI calculation. This can impact your loan eligibility and the loan amount you may qualify for.
Questions to ask:
– How do you handle the departing residence mortgage payment in the DTI calculation?
– Are there any specific requirements or guidelines I should be aware of?
7. Draws Recipient – Paid to the Builder or Borrower
Construction loans are typically disbursed in draws, which are payments made at different stages of the construction process. Some lenders pay the draws directly to the builder, while others pay the borrower. Knowing the disbursement method can help you manage your project’s cash flow effectively.
8. Number of Draws Allowed During Construction
The number of draws allowed during construction can impact the builder’s cash flow and the overall progress of the project. More draws typically provide better cash flow management, reducing the chances of financial difficulties. For example, a lender offering six draws may provide funds at the completion of the foundation, framing, roofing, drywall, interior finishing, and final inspection.
Questions to ask:
– How many draws are allowed during construction?
– At what stages of construction are the draws disbursed?
9. Zoning Restrictions
Some lenders may have restrictions on the types of zoning they accept for construction loans. Rural and agricultural zoning, especially on properties over 10 acres, can sometimes be problematic for lenders.
Questions to ask:
– Are there any zoning restrictions for your construction loans?
– Do you accept rural or agricultural zoning for properties over 10 acres?
10. Minimum Credit Score Requirements
Lenders typically have minimum credit score requirements for construction loan applicants. A higher credit score generally indicates lower risk for the lender, and most lenders require a credit score of 720 or above.
Questions to ask:
– What is the minimum credit score required for your construction loans?
– Are there any exceptions or special programs for applicants with lower credit scores?
11. Prefab Homes
Prefab homes often require a large upfront payment to the manufacturer, which can be a challenge for some borrowers. It’s essential to know if your lender offers construction loans for prefab homes and if they have any specific requirements.
Details:
– Prefab homes are built off-site and assembled on location, which can save time and money during construction.
– Financing options for prefab homes can be different from traditional construction loans due to the unique payment structure and manufacturing process.
Questions to ask:
– Do you provide construction loans for prefab homes?
– Are there any special requirements or restrictions for prefab home loans?
12. Off-Grid Properties
Off-grid properties require self-sufficient energy and water systems, as well as the management of food, waste, and wastewater. Some lenders may not finance off-grid properties due to the unique challenges they present.
Questions to ask:
– Do you offer construction loans for off-grid properties?
– Are there any specific requirements or restrictions for off-grid property loans?
Conclusion:
Selecting the right construction loan officer and lender is a critical step in ensuring the success of your construction project. By considering these key features and asking the right questions, you can make an informed decision and find a lender that meets your needs. Keep in mind that each lender may have its own unique requirements and guidelines, so it’s essential to thoroughly research and compare multiple options before making a final decision.
Contact a construction loan officer for personalized advice and explore our loan comparison tool to find the best lender for your project. Download our PDF checklist with essential features and questions to ask when searching for a construction loan officer and lender.
