What You Need to Know about New Construction Financing
Karen Malanga: Hi, this is Karen Malanga with House Talk. And I’m so excited to have Randy Vance back from Premiere Mortgage Resources.
Randy, the reason that I want to welcome you today is because Kristen and I have a couple more clients, and they’re almost afraid to think about new construction and maybe the possible bumps or hurdles involved in getting new construction financing.
We have discussed with them that the earnest money deposit is usually substantially more, and that if they do upgrades throughout the build, then they’re going to have to write checks for those upgrades that will be deposited into escrow, but then released to the seller.
What other things are a little bit more complicated, and why is it important to use someone like you to navigate people through the process?
Randy Vance: Someone who can stay in touch with the agents who can stay in touch with the contractors, really knowing how things come down. And then we have so much weather, especially moving into the winter months, that sometimes, we say, “Okay, our due date is going to be x,” but then they need a couple more weeks.
So always having that open line of communication, and someone who can really take charge of that communication…
Karen: What I do generally, when we have someone buying a new home, half the time they don’t even live in Bend. So we’ll go by every week, and we’ll take a picture of the framing stage or when the flooring goes in.
I don’t always forget, but sometimes I forget to tell these people that the build of a home is a long process. I don’t want them to go out and buy a new car or increase their debt ratio. Does that ever come into play with you?
Randy: Absolutely. During the process, typically 9 to 12-months when someone’s building a home, someone needs to be with them and helping monitor their credit, making sure that they’re not making those large purchases or getting a new car, per se.
Karen: They have to be disciplined during the process.
Randy: They do have to be disciplined.
Karen: So, you can help guide them through that too.
Randy: Absolutely.
Karen: Do potential buyers of new construction have to have a different credit score than if we were just to move into an existing home?
Randy: Typically, for an all-in-one construction loan, they would need to have a credit score somewhere in the mid to high 6’s, at the very least. But the takeout score, it’s typical conforming guidelines—or excuse me, with the takeout loan, it’s typical conforming guidelines, so as low as 620.
So a takeout loan is a little bit easier to qualify for, a lot less headache, a lot less having to deal with the builder, making sure that they’re doing their jobs on time, making sure that everything’s done. So, there’s a little bit less babysitting there.
Karen: So a takeout loan might be the way to go for this particular client I have in mind.
So basically, when we’re looking at purchasing new construction, the buyer needs to be aware that they do have to have more earnest money down. And a lot of that is builder-specific.
Randy: Correct.
Karen: Pahlisch Homes might require x, and Hayden might require y, or whatever.
And then on top of that, if they have upgrades, they’re going to have to have the money for those upgrades upfront, which makes sense because the builder is changing the home based on their needs.
They’re going to have to be disciplined throughout the process. And you can help guide them through that.
And then above and beyond that, it’s really quite simple, isn’t it?
Randy: Yes. The only other thing I could really think of is the appraisal process. So there’s the initial appraisal that takes place. And often times between the initial appraisal and the final inspection, they’ve done upgrades. They’ve decided they want new countertops or they’ve gotten extra appliances or a fence.
So, making sure that we know what those upgrades are, and keeping us updated to be able to give to the appraiser, that’s going to affect the overall value of their home.
Karen: So basically, it comes down to just communication.
Randy: Absolutely! So there are really two different ways to get a construction loan. You’ve got an all-in-one loan where, from the moment you have plans and specs to the moment that you’re ready to move in, you’re dealing with one lender. The builder can make draws as things are completed—the electricity, the framing. And those loans typically are handled with banks.
The other one is called a takeout or a permanent loan. So for your permanent financing, once the home is nearing completion, usually within 45 days, borrowers will reach out to their mortgage lenders or mortgage brokers and obtain financing that way.
Often times, the builders do offer incentive if they do find their own financing.
Now, working with smaller builders or custom home builders, typically, you want to go the all-in-one route because they don’t have the capital to be able to carry that financing.
Karen: We run into that all the time. So one question I always get from buyers, if they want to move forward on new construction and it’s a pre-sale—so basically, maybe the foundation is in—can you lock a loan rate in at, say, foundation that will last for six months until it’s completed? How does that work?
Randy: You can lock a loan for up to 365 days. Now, anything over than 90 days, there are fees associated with because for the most part, nobody knows what the market is going to do six months from now.
So typically, we will float the rate until we get within 60 to 90 days of completion. It’s really on how the borrower feels, what they feel is going to happen in the market.
Karen: So, what’s the type of loan where a buyer is paying for the construction, and then once the construction is complete, then a 30-year mortgage goes into effect?
Randy: So, that’s the permanent aspect. That’s the permanent financing. Typically, if they’ve gone with an all-in-one, they’ll have a floating interest rate, and they’re only making payments on what has been drawn.
So they’re not making payments on the full mortgage balance, just on the interest and what has been drawn so far.
Then in an all-in-one, once they near completion, then they will lock in their interest rate.
Karen: So Randy, how can someone reach you, so that they can learn a little bit more about what you can provide for new construction financing, and the ins and outs? It does sound a little complex and there are just different ways to move through the process.
Randy: So, with the permanent or takeout aspect (which I would love to help your clients with) they can reach me at www.PMRMTG.com or they can call me on my cell phone anytime at 541-280-8294.
Karen: Thank you, Randy. It’s nice to have our mortgage expert back on the show.
Randy: Thanks, Karen.
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