Not All Lenders Are For Building

Perhaps one of the biggest reasons more people don’t build may be because they did a little research and found out how insanely expensive it is.   …except it isn’t.  As it turns out, not all lenders are created equal, especially in regards to construction loans.  Below is a list of five lenders.  While they they are all fine institutions, construction is not necessarily their strong suit or comfort zone.  In my opinion, offering less than 75% LTV (loan to value) on a construction loan is a signal that they aren’t particularly interested in construction loans, so I won’t delve into them any more than to mention their most basic terms.  An LTV less than 80% means a bigger down payment for the buyer.  It’s like asking for a 30% down payment for a traditional 30 year loan.

BECU
70% max LTV, reserve unknown.

Sterling Savings
70% max LTV, reserve unknown.

Wells Fargo
75% max LTV, 5% liquid reserve.  Cannot have ever lived on the land for which the construction loan is applied.

Banner Bank
80% max LTV, 2 months loan payments in reserve.

Washington Federal
70% max LTV on lot and 80% max LTV on construction, 10% contingency can built into loan.

Reserves are very important for any construction or remodel project, but they can get onerous when they must be a proven liquid asset (not stocks or retirement funds).  The liquid asset requirement could be thought of as additional down payment that only gets refunded to you at the end of the project.

When I started this project, I checked with the institutions I knew and trusted.  I started with BECU but quickly got discouraged by their inept front-line folks (I still love you, BECU, but it’s true) and dropped the idea of construction for several months.  Then we stumbled across the one and I knew we really had to dig further into financing.  I called Wells Fargo, our mortgage holder at the time, as well as Sterling Savings (formerly Golf) who had originated our first home loan.  At that point I was already in contact with the builder and they advised us to check into their preferred institution, Banner. Skeptical, I decided to check banner last.  Through a series of inquisitive phone calls with all three institutions, I learned about reserves, LTV, construction rate markups, timelines, and so much more.  In the end, Wells Fargo actually said they can’t compete with the other companies and that Banner and Washington Federal are our best bet.

Some institutions aren’t yet on the single converting loan bandwagon yet.  Depending on the institution, you might have one loan for the land (if you don’t own it yet), one for construction, and then have to re-fi both of those into a final 30-year when the build is complete.  Aside from being a huge paperwork hassle, that’s two or three loan origination costs, credit checks, and loan closings.  I’d recommend avoiding any loan product that doesn’t encompass land and construction and that doesn’t automatically convert to a 30-year when complete.

Ask around for the best construction loan institutions in your area.  Use the forums for Redfin, Zillow, contractortalk.com, and the like.  Check Angie’s List and checkbook.org.  Finally, call several builders and see whom they recommend.  Once you have your call list together, here are some of the things you should be asking them about:

  • Rate
  • Float-down on build completion
  • Automatic 30-year conversion
  • Max LTV (or min down payment)
  • Reserve requirements
  • Standard closing time
  • Actual average closing time for construction loans in the last 6 months (you may have to press hard for this)
  • Loan agent’s experience with construction loans
  • Is the institution actually going to hold the loan, or are they acting as the broker for another lender

Additionally, you should have your feelers out for the following:

  • How big is the construction loan department?  One person or a whole team?
  • Are construction loans prominently featured on their website, or do they get a mere cursory mention?
  • Is the loan agent on the ball?

At the time of writing, we are still in the loan closing phase, so we will definitely be learning more.  Please check back for updates.

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