When applying for any major loan, the factors involved to qualify for the amount that you’re looking to borrow can be quite complex. When it comes to construction loans, there is an added complexity as these loans aren’t for just two parties - the lender (the bank) and the borrower (the prospective home buyer). Rather, they are seen as a delicate dance between three different parties - the lender, the borrower, and the builder so everything stays on schedule along the way! Because of this, it’s crucial to work with both the right banker and the right builder.
What Should I Look for in a Builder?
A bank is going to examine the home builder that you’re working with to build your custom house. It’s in their interest to be sure that the home will be built well and built on time. In a standard mortgage, there is an already existing home that can serve as collateral if payments can’t be made. With a construction loan, the bank must gamble on the builder doing their job correctly on-time and on-budget, so it’s likely they’ll only make that wager if they have faith in the team.
Seek out a Tenured Builder
You should be sure to work with a home builder who is well known for their history of doing superior work. While a new builder might seem exciting and entice you with a great deal, a bank may not feel as comfortable underwriting a construction loan if your builder doesn’t have a track record of building quality homes on time and on budget. Choose a well respected builder with a sustained history of completing their jobs as outlined, like Schumacher Homes, and banks and other lenders will be more expeditious to push the loan through to get you started down the road to a new home.
Work with a Fixed-price Builder Rather than a Cost-plus Builder
There are two sorts of contracts that you can sign with a builder. One is known as fixed-price and the other as cost-plus. The difference is fairly simple but can have a dramatic effect on your ability to obtain a construction loan.
With a fixed-price builder, the price that they quote for your custom home build is what you pay. If the price of lumber, glass, steel, or anything else increases during the course of construction, the builder must either absorb the cost or find a better price.
With a cost-plus builder, the contract is only an estimate based on the current price of materials. If, over the course of the construction process, the price for the supplies needed to build your custom home rises, that change in price will be factored into the total due by you at the end of construction.
For obvious reasons, bankers do not like cost-plus builders. Banks like to see exact numbers so that they can set their rates. If they aren’t able to know the final cost of your construction for certain, they could be wary to lend you money.
What Should I Look for in a Bank when Seeking a Construction Loan?
As we mentioned earlier, a construction loan is a delicate balance between three different parties - you, the builder, and the lender. Just as important as choosing the right home builder is choosing the right bank.
Construction loans aren’t quite as common as other loans and not every bank specializes in preparing them. Just as you don’t want a home builder who doesn’t know how to measure their lumber, you don’t want a lender that doesn’t know the construction process fully.
Ask questions! There is nothing wrong with interviewing a banker about the construction loan process to see how familiar they are with them. Ask about terms, frequency of the interest payments, what those interest payments would look like, and what the usual loan amounts to when it comes to building a home.
A banker well versed in construction loans will have all of the details at hand, just waiting for you to ask. If they don’t, they might not be the best partner and that could cause delays in the loan progress or payments (draws) later on to your builder.
In Conclusion
You’re developing a close partnership with both your banker and your builder when signing a construction loan. Take time to find a respected builder and an experienced lender so that you can sign a seamless construction loan and build your new home with great terms and without any issues along the way.
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.
About Schumacher Homes
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 showcase homes displaying the latest in architectural and product trends. Stop in today, be inspired and receive your no obligation price quote.