Construction Loan Procedure

Of three potential lenders, one was willing to take a look at our application based on our budget and architectural plans without waiting for a full round of structural engineering. The others wanted to wait for the “plan packet” – basically the full set of construction plans submitted for permits. Overall, the construction loan procedure was otherwise pretty similar between the lenders.

All of them wanted a full set of financial documents from us, similar to applying for a standard mortgage. Information on income, assets, and debts. They also all wanted a set of plans and a detailed build budget.

The first full prequalification letter we received was from Centennial Lending, though their terms weren’t great. They wanted $25,000 in closing costs. That seemed like a lot. So we continued to shop around.

Guaranteed Minimum Price

As part of the process, we started working up our construction contract, though our plan was to hold off on finalizing it until we got some input from the bank on how they wanted to structure the draw process. The draft contract had a great-looking phrase on it: “Guaranteed Maximum Price.” Our expectation was that we’d have a target price, but if, say, labor was more expensive than forecast, we would have to pay the higher rate. But “Guaranteed Maximum Price” sounded like it would be the cap on what we would need to pay for the build.

After talking things over with Shaun a bit more, it turned out that wasn’t the case. If things were more expensive, we’d have to pay more – he wasn’t guaranteeing the build at a fixed price, where he would eat the overages. That was disappointing, but made sense. Most builders offered “cost plus” contracts, where the owners pay the build cost plus a percentage or fixed amount for profit. Some builders offered fixed-price contracts, but they carried the warnings that owners on fixed-price builds would usually end up paying more. The builder would need to bake in plenty of padding to ensure the builder wasn’t going to lose money on the deal.

Starting the Build

In shopping banks for the construction loan, US Bank told us they couldn’t finance the project if we broke ground before financing was locked in. That would be a problem for us under the “fast” build plan, which would have us breaking ground as soon as our building permits came through in the fall. We planned to fund that stage in cash if we needed to, since other banks, like Alpine, were telling us that we could go as far as finishing foundation work before the loan came through. We told US Bank thanks but no thanks; if they needed financing in place first it wasn’t going to work.

Then, miraculously, they told us they could make an exception so long as their lien got first priority (in other words, if it all went south and they foreclosed, they got paid first). So we went forward with the process to see if they could get us better rates.

Scavenger Hunt

Some of the process felt like a scavenger hunt. Beyond the expected financial disclosures, we got “go get a homeowner’s insurance quote on a property that doesn’t exist yet” and “we need the budget signed by the builder.”

We decided to move forward with U.S. Bank, since they had an attractive product that nobody else was offering: single-close construction loan that automatically converted into a 30-year fixed mortgage. The single closing meant that we were only spending on closing costs once. Though a number of other banks had single-close construction loans, all of them converted into adjustable rate mortgages (ARMs). After seeing the 2008 crash and the currently still fairly-low interest rates, we wanted to lock in a fixed rate if we could. If rates improved down the road, we could always refinance. So we started collecting scavenger-hunt items.