Construction loans are a different type of program from a conventional mortgage. For those home buyers seeking out construction financing, there are a few things you should know in advance.
We spoke with three mortgage officers about what they are looking for when they meet with a customer for loan qualification, as well as some of the options currently available.
Assets and Income. According to Nicholas A. Brouillette, State Sales Manager in Maine for KeyBank Mortgage, buyers should gather their financial information to bring to the first meeting. “Any information regarding your assets and income should be documented for the loan process. This might include W-2 statements, bank statements, 401K accounts, stocks and other investments,” Brouillette said. If you are self-employed, or own a business, you’ll need to provide the past 2 years of personal and business tax forms.
Credit Score. Brouillette said, like most financial institutions, KeyBank uses a credit score called a “tri-merge” of scores from the three credit reporting agencies Experian, Equifax and TransUnion. The tri-merge score is the median score of the three reports. Once a year you can request credit reports at no charge from these companies, according to the Federal Trade Commission’s website. Other credit services may either monitor only one of the three agencies or use their own scale, which may not reflect your true, reported score. Relying on other service reports for the credit score can result in a surprise in the lender’s office.
Understand how the money is distributed. Some mortgage lenders conduct an initial closing to allocate the construction funds, then once a Certificate of Occupancy is issued, a second closing to reconcile any changes, unexpected charges or costs and finalize the mortgage over the long term. KeyBank Mortgage offers a single closing program with “draws’ based on a schedule of milestones in the building process, which is written down in advance of construction start.
Another lender, First Colebrook Bank, operating in Vermont and New Hampshire, offers a loan that locks in the rate (currently 6-7/8%) for 45 months, then converts to a thirty-year Adjustable Rate Mortgage. The loan has no prepayment penalty so that once the construction is completed, the homeowner can re-finance to a fixed rate mortgage. According to First Colebrook’s Kerry Long, the loan was designed with customers who are acting as their own general contractors. First Colebrook does not sell their mortgages on the secondary market, but keeps it in their portfolio.
Maintain good records of work completed. This is especially important for work done prior to the actual home construction, such as septic installation, forest clearing, foundation work, fill, drainage, or other infrastructure. Make sure you receive receipts and releases for any work done on the home. It is very important that the lending institution is able to show clear title, without any mechanics liens or encumbrances.
Log homes comparables. The bank or lending institution will use area comparables to determine the value of the structure to be built. In certain regions this may pose a challenge for log homes. If your builder has a list of completed homes in the area that can be included as comparables, your lender will have an easier time completing an accurate appraisal.
Investigate other mortgage options. Local and regional credit unions may offer comparable or more favorable rates for mortgages, and generally keep their loans in their portfolio. Another potential source for mortgage funding is the state-by-state Farm Credit, which has affiliate programs in each state. These loans are underwritten for consumers who earn their livelihood through farming, fishing or forestry industries. According to Fred Morton, chief lending officer at Farm Credit of Maine, his organization does some lending for residential properties under certain conditions. The home must be the primary residence and located in a rural area (towns with populations of less than 2,500). Farm Credit keeps the loan within its portfolio and provides approximately 75% of the total value in a mortgage.