| 1. What is a good construction loan? | | | | sudden vanished. |
| A typical construction loan nowadays is a construction | | | | * You are offered a construction loan with no points |
| to permanent loan that may or may not allow you to | | | | and no loan fee's. What you are not told is that you |
| lock-in todays low interest rates until the home is | | | | are paying for it with a higher interest rate and the |
| completed. If you choose a loan that does not allow | | | | costs are built into the loan. |
| you to lock in upfront, the interest rate may end up | | | | * You are told that you will not have any payments |
| higher along with your monthly payment. | | | | while you're building. What you're not told is that all |
| 2. Should I use A Broker? | | | | construction loans have this option and it's called |
| The most important thing when searching for a good | | | | "interest reserves" and the payments are added to the |
| construction loan is to find an experienced construction | | | | loan amount. |
| loan specialist that knows which banks are the best. A | | | | Remember three important facts and you will always |
| broker is a representative for hundreds of banks. | | | | be in good shape. |
| Although the broker serves as middle-man, his or her | | | | 1. If it sounds too good to be true there's usually a |
| services will not cost you anything extra. That's | | | | reason. |
| because brokers get loans at wholesale rates, and | | | | 2. Always get your quote in writing, (ask for a good |
| pass them along to their clients at retail prices, just like | | | | faith estimate). |
| any other business. | | | | 3. If you are satisfied with the rate and construction |
| * Wholesale and Retail - The difference between | | | | loan program that you are quoted, ask to lock it in |
| wholesale and retail is how brokers make money. | | | | upfront. |
| Therefore, you get the same rate from a broker as if | | | | On the flipside, it is very important to realize that most |
| you went directly to the lender yourself. | | | | loan products typically go hand in hand with banking |
| * In Fact, because or their volume, many brokers are | | | | guidelines. These guidelines are provided to loan |
| able to offer their clients better deals than you can get | | | | officers to coincide with the customer's qualifications. |
| by talking to the banks on you own. | | | | For example, if you have a very high (FICO) credit |
| * With an experienced construction loan broker you | | | | score with land free and clear, you have more loan |
| can shop dozens of the most competitive banks | | | | options than the person with a very low (FICO) score |
| nationwide, work with wholesale pricing and can | | | | and no land equity. |
| negotiate on rates and pricing. Also by submitting | | | | 5. Banks really don't want you to know this! |
| multiple loans at the same time you will not lose extra | | | | All banks have access to the same rates and the only |
| points on your FICO score. | | | | reason everyone ends up with a different rate is |
| 3. When Should you lock in your construction loan | | | | directly related to how much your loan officer and |
| before you start building, or let the interest rate float? | | | | bank is going to profit from you. |
| If the rates are heading upward, lock. If the rates are | | | | You should probably read that one again. |
| stable, relax. If the rates are headed downward, float. | | | | Your loan officer gets paid like all sales people either |
| Right now interest rates are at an all time low and can | | | | by: |
| only go up. Lock into the best interest rate with the | | | | * Salary plus commission |
| ability to float downward. | | | | * Commission only |
| Inexperienced loan officers will offer their customers | | | | It doesn't matter if you walk directly into a bank or |
| an enticing low adjustable rate during construction | | | | work with a broker, basically everyone gets paid the |
| without an upfront lock-in and the customer may end | | | | same. If you walk directly into a bank the loan officer |
| up having to lock into higher interest rates when the | | | | most likely gets a basic salary and a percentage of |
| home is completed. Or the customer is sold on a | | | | the loan origination fee (points and yield spread |
| higher rate during construction with a float down option | | | | premiums). If you work with a broker the broker usually |
| after the home is built. Again, the rate could be much | | | | works on a straight commission (points and yield |
| higher when the home is completed. Meanwhile the | | | | spread premiums). Becoming a broker allows the loan |
| loan officer has been paid and has moved on to the | | | | officer the ability to offer their customers the best |
| next loan. The only time you want this type of loan is if | | | | loans with the most options. |
| it's the only loan you qualify for. | | | | It always amazes me when I see TV commercials or |
| Most loan officers do not explain this to their | | | | hear radio commercials advertising $395, zero closing |
| customers until it's too late (Closing). Always ask. Is the | | | | costs. I always wonder if people understand how they |
| construction loan rate locked upfront or floating during | | | | can do that. |
| the construction loan period? Then ask, is the rate | | | | Ok, here is how it is done. |
| during the construction loan the same rate when the | | | | The inside secret is that in exchange for these low or |
| loan converts into the mortgage period. | | | | zero closing costs the lenders will make their profits |
| How do I qualify for a construction to perm loan, and | | | | and cover the costs of the loan by charging you a |
| what are the procedures? | | | | higher interest rate. |
| The first thing your loan officer wants to see is your | | | | This higher interest rate pays what they call in our |
| completed loan application. The loan application called | | | | industry a (YSP) yield spread premium. |
| the (1003) will tell a story of your financial picture. | | | | By charging you a higher interest rate over the life of |
| The completed loan application will tell the loan officer | | | | the loan the bank can easily afford the commercials, |
| many things including, | | | | commissions, payroll, and cover the costs of the loan |
| 1. What type of loan you want. | | | | while still making a profit. Also the service is usually |
| 2. How much money you need. | | | | very poor and impersonal. |
| 3. Your social security number. | | | | So the next time you see advertising with no closing |
| 4. Your current employers. | | | | costs you will know exactly how they are doing it. |
| 5. A list of all you assets (money) and liabilities (bills). | | | | So please remember that there is no such thing as a |
| 6. How much money you make. | | | | free lunch in any business. Business wouldn't be |
| 7. How much real estate you own. | | | | business if there were no profits. The most important |
| Once the loan officer has your loan application in hand | | | | thing is that you want the best loan available at a fair |
| they can determine whether you can qualify for a loan. | | | | price with an experienced loan officer. |
| One of the first items pulled is your credit report. The | | | | 6. What are interest reserves and contingency funds |
| credit report is going to tell 3 main important things. | | | | doing in your closing costs? |
| * Show your current credit score. The credit score | | | | The two things most customers do not factor into the |
| can range from 500 to 800. | | | | cost of the building their new home are interest |
| * Show a complete list of all your monthly liabilities (bills). | | | | reserves and contingency funds. |
| * Show all past credit problems including bankruptcies, | | | | Interest reserves are added to your loan amount to |
| foreclosures and late payments. | | | | make the monthly payment on your loan. Yes, you |
| With this information the loan officer will do an analysis | | | | read that correctly, you will not have to make a |
| to determine if you can qualify for the loan amount | | | | monthly construction loan payment while your home is |
| that you're looking for. This analysis determines a ratio | | | | being built. The payments are made from this interest |
| called the (income to debt ratio) and depending on the | | | | reserve account and no, it's not free. This reserve is |
| banks underwriting guidelines this ratio will usually range | | | | added to your construction loan amount. Interest |
| from 36% to 45%. The income to debt ratio is the | | | | reserves were designed for the benefit of the |
| percentage of monthly debt payments (including your | | | | customer. Most people building a new home are either |
| new mortgage payment, taxes and insurance). This | | | | paying rent or have an existing mortgage payment |
| ratio should not exceed 36% to 45% of your monthly | | | | while their home is being built. |
| income. Some banks will allow you to exceed this ratio | | | | The last thing a customer needs is another monthly |
| if you have an excellent credit history and excellent | | | | payment while building. So, banks created the interest |
| credit score. The current and the most popular method | | | | reserve account by adding up the estimated interest |
| of qualifying for a loan today is the stated income loan. | | | | payments over a 12 month period and add this to the |
| Banks are currently changing underwriting guidelines | | | | loan amount. |
| because of the amount of bad stated loans they are | | | | If you do not want interest reserves added to your |
| foreclosing on. | | | | construction loan amount you can ask to make your |
| Stated income allows you to qualify without verifying | | | | own monthly construction loan payment. Contingency |
| your income on your tax returns, W 2's or pay stubs. | | | | funds are added to the loan amount just in case you |
| The only thing the bank verifies when applying for a | | | | need more money to build your new home. |
| stated income loan is your credit score, liquid assets | | | | With all good intentions construction loans tend to have |
| and that you're employed. | | | | cost over runs. The bank adds 5% to 10% of the cost |
| 4. "Bait and Switch" Don't be taken by one of the | | | | breakdown and adds this amount to the loan amount |
| oldest tricks in the book | | | | just in case you have cost over runs or need better |
| The mortgage lending business is notorious for baiting | | | | appliances. If you don't need or use this extra |
| and switching. Baiting and Switching is when a loan | | | | contingency fund then it will not be added to your |
| officer or advertisement offers you one thing and then | | | | mortgage upon completion of your new home. |
| tries to sells you something else. | | | | So when you apply for a construction loan ask your |
| Typical signs of baiting and switching are obvious, | | | | loan officer to provide you a copy of the estimated |
| some basic examples are: | | | | construction loan budget. The budget is created from |
| * Over the phone, you are offered a much lower rate | | | | your costs and includes every cost within the loan |
| than any other quote and once you've sent in your | | | | including land balances, closing costs, interest reserves, |
| application the rate you were quoted has all of a | | | | contingency and bank fees. |