Well, it’s done. We signed closing docs and can begin construction in earnest. We are now the proud owners of an overgrown half acre in the Emerald City. Our planned 45-day closing period took a dreadful 60 days, but we survived and have renewed optimism for the next phase. Looking back, the process produced as much anxiety and ultimately proved as cathartic as the birth of my first child. With any luck, learning from our mistakes might be a great benefit to you.
The Great Recession ushered in a lot of changes for the real estate industry. While the purchase of our first house in 2007 was a relative breeze, this one was a painful slog. Many factors influenced our experience, but the most prominent ones were:
- Last-minute rush to underwriting
- A series of processing errors
- Extreme scrutiny of our finances
- A late-emerging loan policy which threatened to bust the whole deal
My impression of the construction loan closing process is that some things do indeed take longer. There’s a slightly more in-depth appraisal and the builder must be checked out.
Our experience tells me that 45 days to close the loan may, at best, be overly optimistic. At worst, 45 days is an invitation to de-prioritize the process in favor of other loans that close sooner. It’s the procrastinator’s paradox: given more time, a procrastinator has a lower likelihood of timely delivery. For example, on day 56, the bank was just getting around to performing employment verification and substantiating funding sources–things that could have easily been done on day 10.
A comedy of errors
Repeated fumbles add up quickly:
- Rejected IRS form: approximately 1 week to re-process
- Error in loan calculation: 5 day delay
- Another error in loan calculation: 7 day delay
Correcting a calculation error triggers a disclosure waiting period during which time our loan was put on hold. The official timeout is three days, but this delay spanned weekends and was drawn out since paperwork needed to be processed before the delay could start.
There were fixes and tweaks going in up until the very last minute. We got the HUD-1 90 minutes before signing and I sent the escrow company and my bank scrambling to rectify an error that amounted to almost $30,000. Our final loan still lacked thousands in credits we were owed from the bank, but I’m assured they’ll cut us a check along with the first disbursement.
Under the microscope
Substantiating our loan led to the generation of 40+ documents containing well over 200 pages of financial information. The length of the process meant that two additional statement cycles had to be provided before closing. Each new document submitted led to more questions and more documents requested. In the name of due diligence, we ended up having to provide proof of every deposit in any checking/savings account, big or small. Traditionally, you only need to show that your down payment funds weren’t loaned or borrowed. In our case, we provided substantiation for about 120% of our down payment.
Even after our loan was approved by underwriting, we continued to be peppered with documentation requests–right through the Friday before we signed. I finally pushed back when asked to make a three-way phone call to a credit card company to verify a payment I’d made.
This may be the new normal, or perhaps the underwriters felt compelled to provide extra scrutiny to our loan. The one thing I can say for sure is that it really pays to keep your documents well organized.
When six of one is not a half dozen of the other
On a day a week ago, when we should have been out signing closing documents, I got a call from the banker telling me he had heard back from underwriting and they had four “items.” The first three were more funding documentation requests, but the fourth was something more. As he explained the situation, I could see the deal crumbing much like the sandy soil on which our house would have been built.
There is a lot to be said about this particular issue, so I’ve broken it out into its own post. Please see the next post for more info.
What would you change?
If I had to do it all over again, the most important thing would be to follow the advice I shared previously. Specifically, I would directly verify the construction loan experience of the broker and their lending institution. Our big mistake there was assuming that our broker’s years of experience and other open construction loans meant he had years of construction loan experience. There are a lot of differences between conventional and construction loans and you really want to work with a lender who has been all the way through the process several times in recent months.
If I didn’t have any choice but to go with a less-experienced institution or broker, I would definitely have hired an experienced real estate attorney who would be responsible for dealing with the bank and error checking the torrent of docs. In fact, I would strongly consider the attorney regardless of the lender’s experience. (For the record: my wife called this one early on)
The next big milestones are permitting and breaking ground. Things may start moving fairly quickly now. This is also the fun phase where we pick out colors and textures and nail down our finish details.
Given all of our problems with closing, I cannot make a recommendation to use Banner Bank–at least not today. Their service was quite polite and very good at communicating updates, but they have a lot of bugs to work out and experience to regain.
There are many banks who are not fully up to speed with construction loans–our closing agent mentioned several times that they don’t see very many construction loans coming through. This market is just waking up again after several years of minimal activity and some huge regulatory changes. One might expect similar difficulties from any institution for the next several months as the financial industry gets back on the horse.
Please feel free to leave your feedback about construction loan financing institutions in the comments box below. Good or bad, others will benefit from your experience.Photo credit: Justin Shearer