The process for getting a construction loan isn’t overly complicated, but as with anything, it can be a bit intimidating if this is your first time going through the steps. Our team members at Schumacher Homes will happily walk you through the process, and our lenders are fantastic at laying out the steps involved and helping you out along the way. The most important thing to know when it comes to obtaining a construction loan is that it’s okay, and expected, to ask a lot of questions. Trusted bankers and tenured custom home builders work with construction loans every day of the week and are a wealth of information. As long as you are working with good partners, the work is halfway done.
Of course, all loans start with the bank - or a similar lender. Here, you’ll typically start things off by meeting with a loan officer. While the title might be a bit formidable, you can think of the loan officer as a loan consultant. Working with the loan officer is similar to working with a college counselor back in high school. They aren’t the person with the power to grant the loan, they are really there to guide you through the process, answer any questions that you have about the loan, and prove to you that this is the lender that will give you the best deal and provide you with the most support throughout the contract.
The loan officer will work with you to collect all of the usual and customary pertinent information, and for a construction loan this often means gaining access to your credit history and looking into your general financial stability. They will then take that information and hand it off to their coworker, the underwriter. Again, an intimidating title, but really this is just a finance expert. The underwriter takes the information collected from you by the loan officer and compares it against their checklist of financial and legal requirements. If they see anything abnormal or simply need a bit more information, they’ll use the loan officer as a liaison to work with you in order to secure that additional detail.
It’s pretty typical to worry when the loan officer gives you a call and asks for additional information or paperwork.
“Why? Did I do something wrong? Am I not going to get this loan?”
Don’t sweat it! It’s extremely common for the bank to come back and ask for some more details. Each financial situation is different and neither the loan officer nor the underwriter know exactly what unique data they might need until the process is underway. As long as you are working with a trustworthy lender, like any of the Schumacher Homes lenders, you can be sure that you are in safe hands and that everything is going to plan. Just like with construction, one of the most important ingredients is time.
Just as when purchasing an existing home, a major part of the process in obtaining a construction loan is the appraisal. The bank is putting their money on the line and as such, they want to judge for themselves what your new home is worth.
“But wait!” you say, “I don’t have a home to appraise, and my builder has already told me what it would cost. Can’t you just go by the proposal?”
Certainly when appraising a home that hasn’t yet been built, things are slightly more complicated and yes, one piece of the puzzle is looking at the estimated building costs that have been provided by your builder. Ultimately there are a number of elements that will go into your loan valuation.
Your construction loan appraiser will be looking at a full matrix of elements when it comes to putting value on your future custom home. Primarily, they will be looking at your builder, your neighborhood, and the projected value of the construction itself.
The Builder
It is crucial to work with a quality custom home builder when approaching the loan process as they will be evaluated just as much as you and your financial history. This is why it’s so important to work with a builder with some history behind their name. Banks want to know that their construction quote is legitimate and that their quality is top of the line. Remember, the bank is assuming two things - that the home will indeed be finished and that if you can’t pay off the loan, they can sell the home to repay themselves. This is a deal between three parties, so choosing your builder is important in the loan process along your own financial history.
The Neighborhood
Considering the location for your new home is just as important for your day to day life as it is for obtaining a construction loan. Similar to purchasing an existing home, one factor to the overall valuation is the value of other nearby homes. The construction loan appraiser will look into prices for nearby home sales to gather an idea of what people are willing to pay for a home in your new neighborhood. If homes are older, or small, or just not built with your quality or caliber of finishes, that can easily affect the value of your brand new custom home, as their value will be low.
It’s important to seek out a neighborhood, and a plot of land, where the general value of homes is similar to what you plan on building. You don’t want to be the biggest and most expensive home on the block, as it will give you quite a headache when trying to obtain a loan to get it built.
The Value of Your House
Your house will generally be judged based on the intended square footage and the quality of materials and finishes that you plan on implementing. That said, some design choices can be higher cost than equal value addition items, and these can raise your construction quote while not raising the ultimate value of your home in an equal ratio. These items, as we give examples below, might be highly desirable pieces of your dream home, but when it comes to a bank appraisal, they simply won’t see as much intrinsic, resale value in these additions and they therefore won’t add much to your appraisal as extra square footage for example.
A commonly cited example of a higher cost than value addition to your home is a basement. A basement is essentially an expensive extra room or two. Given the actual cost to build an underground room compared to the cost of raising some wooden beams above ground, a basement is considered an addition that costs quite a lot to create, but doesn’t end up adding as much appraisal value to your home.
Another typical example would be a large, wrap-around porch. Many Schumacher Homes customers love the idea of extra outdoor space, as do we, where they can relax with the family, but given that the construction of a porch has many similar structural elements to an actual room in your house, but adds zero square footage to your home, an appraiser could see this as a low value addition.
As you can see, there are several factors involved in both the process with your bank and the process on the ground with your construction company and the bank’s appraisal. Nothing is overly complicated, and with the right team, you’ll be well covered for the process.
Banks see construction loans as riskier endeavors than standard mortgages, and there are several reasons why they might not put the value of the loan on the same pedestal as you were expecting. Even so, not being appraised for the value that you expected because of the neighborhood or because of an addition that you’re married to doesn’t mean you can’t move forward with construction - it just means you might have to dig in and pay a bit more in your cash down payment than you thought. Just how much will you have to pay for a construction loan? We cover that topic here.
Schumacher Mortgage LLC (NMLS #2101256) is Schumacher Homes’ affiliate which specializes in construction loans. Together, we want to make your dream home building a smoother experience from start to finish.
We have worked with Schumacher Homes on countless projects. Schumacher Mortgage Loan Officers are experts in construction loans, offer top level customer service, and offer you great loan terms and options. Very few banks and lenders are as experienced in construction loans. When you work with a traditional bank or lender that does not specialize in construction financing, you may have limited program options available to you and may experience delays, both in getting your final mortgage as well as in the construction of your new home.
But with Schumacher Mortgage, you should expect a smooth process from start to finish. Our team is comprised of people who have many years of experience working with Schumacher Homes. When you choose to work with Schumacher Mortgage as a Schumacher Homes customer, it means a streamlined construction draw process, meaning fewer building delays and a faster build for you!
Not only can we provide a collaborative, enjoyable experience when partnering with both Schumacher Homes and Schumacher Mortgage, you can expect competitive interest rates.
Schumacher Mortgage and Schumacher Homes are two separate companies. Schumacher Homes helped form, and has a major ownership position in Schumacher Mortgage, because it wanted to ensure that its customers would have both a wide range of flexible construction loan programs and superior customer service. Customers may seek home financing from the mortgage lender of their choice, but when working with both the Schumacher Homes and Schumacher Mortgage teams, we think customers obtain a more streamlined home loan process.
Schumacher Homes, based in Canton, Ohio, is America’s largest custom homebuilder, with operations in 30 markets in 12 states across the country. The National Housing Quality award winning company has built over 20,000 homes, customized to fit each family’s lifestyle, since its founding by Paul Schumacher in 1992. Schumacher Homes takes each customer’s inspiration and gives it a home. Each Schumacher Homes location includes a one-stop shopping design studio and model homes displaying the latest in architectural and product trends. Stop in today, be inspired and receive your no obligation price quote.