As a mortgage loan officer specializing in construction financing, I've noticed a significant shift in the housing market over the last few years. We've grappled with supply chain issues that threw project timelines into disarray and left builders gambling on material costs. Now, supply chain issues are largely resolved—but existing home inventory is unusually tight as many sellers are reluctant to move and take out a loan at a higher interest rate than their current financing. The surprising result is that new-home construction is booming.
While the prospect of building your own home can seem daunting initially, the rewards can far outweigh the challenges. You can minimize those challenges by asking questions up front. For most people, that’s intuitively obvious when selecting a builder. But don’t forget to ask questions of your prospective lenders.
You probably know to ask about interest rates and fees. But unless you’re already familiar with construction financing, you may not think to ask the following three questions.
1. What is your down payment requirement?
The amount required for a down payment can be a significant factor for many prospective borrowers. Many lenders require 10% down, or more. You may significantly benefit by selecting a lender that requires a lower down payment - only 5% down. The difference may not sound like much but can be a substantial amount of money—enough to help people avoid dipping into reserves or investment accounts to get the loan done.
Also, if you currently own the land you plan to build on, the equity in that land can serve as the down payment, which means you might not have to bring additional cash to the table. This often comes as a pleasant surprise to borrowers who may not be aware of this opportunity.
2. Do you have a one-close or two-close financing process?
In a one-close process, the construction loan and the mortgage are combined into one transaction, meaning you only close once, saving you time and possibly additional costs.
Some lenders require a second closing when the house is complete, which can introduce into the process additional complexity, stress and even interest rate uncertainty. Confirming this detail upfront can contribute to a smoother financing experience.
3. How fast do you turn around draws?
This question will help you understand the lender's speed and efficiency. In the construction industry, it's common for builders to require funds in stages, or "draws." Prompt processing of these requests can significantly impact a project's timeline.
General contractors are already fighting the battle of trying to get your home built on schedule as they order materials, line up subcontractors, and work with client selections. The last thing they need is a delay in the draw funding process. Many builders have expressed to me personally how much they appreciate having draws turned around quickly.
Specifically, ask if your bank can turn around draws within 24 hours. That level of speed not only makes life easier for builders but can also mean the project is completed sooner for the homeowner.
Above all, look for a lender focused on your individual needs
Ensure your lender is committed to making your financing experience comfortable and seamless. Remember, you're not just choosing a loan; you're selecting a partner in a significant investment. Look for personalized service, creative thinking, and the willingness to work within your individual needs.
For example, say you’re building a house that features custom cabinets. The cabinet builder may require a down payment on the order. That’s no problem if your lender is flexible and, ideally, has experience working with the builder and subcontractors involved. But it might be a problem if your lender is more rigid or unfamiliar with the parties involved. Ultimately, what sets a lender apart is their ability to foster client relationships through empathy, flexibility, and quick responses. The financing process can be complex and overwhelming, and having a professional guide who can demystify it is invaluable.