4 Things to Consider in a Custom Construction Loan

   

If you’re house hunting, then you’re likely to find something you don’t love at every viewing. For some shoppers, it could be small – the island in the kitchen needs to be a little to the left – for others, it may be a bit more significant – it’s missing that extra bathroom.

If you are more flexible in your house’s location, and you have some extra time, building a custom home may be the only way you end up with a place that meets ALL of your qualifications.

Unfortunately, building a custom home is often far more complicated than purchasing a “turnkey” house. There’s more room for error – see government permits, building certifications and weather-related challenges - and a lot more parties involved  - architects, electricians and inspectors. Naturally, this means that receiving financing for your custom build could be a lot more complex too. Here are a few things to think about:

Build in time for inspections & approvals.

When you buy a move-in ready home, you’ll likely be approved and receive almost all of the funding you need from your lender in one lump sum. (Less the escrow process, of course.)

How does that work? After completing a lender’s pre-approval/pre-qualification steps, you’ll be approved for a mortgage up to a certain dollar amount. Then, after a few inspections of the specific house that you want to purchase, your lender will provide the funds to the seller in order to complete the purchase.

Photo of home inspection

Alternatively, when financing a custom home, your financing will usually be provided in “stages.” For example, you may receive a certain percentage of your total loan amount to purchase the land, then another to start the foundation, followed by yet another to complete the structure, and so on. However, lenders will almost certainly have inspections and verification steps that need to be completed BEFORE you receive the next set of funding – another reason it’s important to be flexible and build in extra time in your process. Many lenders may even require separate loans, with their own unique application requirements, for these various building “mile markers.”

You could need more than one loan.

 

As mentioned above, many lenders require multiple loans in order to build one house. For example, one loan will pay for the building of the home, and the other will be your “permanent” financing.

 At WaFd Bank, our custom construction loan is a little more unique, and easier to understand (at least we think so!). Unlike most lenders, we only require ONE loan for both the construction of your home AND its permanent financing. This means you’ll have just one underwriting, one monthly payment and one loan to keep track of – helping you keep your project on time and running smoothly.
Photo of mortgage paperwork

Who you're working with at the start may not be the ​permanent ​financer.

As is the case with most home loans, your custom construction mortgage could be bought and sold multiple times. Many lenders sell their products on the “secondary market.” So although you may be applying and working with the local bank branch down the street, there’s a good chance your loan(s) will be sold to Fannie Mae or another big-box lender. If you’ve got multiple loans for your home – and most custom builds do – this can lead to confusion on behalf of the homeowner. 

We do this a little differently too. As a portfolio lender, we don’t sell our loans. So if your mortgage is with WaFd Bank today, then you can rest assured that we will always be there to answer your questions or concerns tomorrow.

Your build could be subject to other lender's requirements too.

Another draw back of working with a lender that sells their loans on the secondary market? Your project’s loan(s) will likely be subject to other lender’s requirements too. If a lender turns around and sells the loans they originate to another party, then they need to ensure that those loans meet that third-party’s qualifications too – leading to the possibility of extra underwriting requirements for you.
photo of a house being built

 

We're here to help you build your dream house.

If you’re thinking about building your dream house, then let’s chat! Contact your local loan officer for information about how we can help you. 

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