Optimize Your Construction Loan: Lender Selection Essentials

Building your dream home starts with proper selection of your construction loan lender. A smooth application, construction process and closing hangs in the balance. Here are a couple rules of thumb to keep in mind.

The lender’s ability to close your construction loan and manage it properly through the completion of your house is more important than interest rate or closing costs. Construction loan lenders are easiest to work with in their local areas of expertise.

Find out which construction loan lenders other people in the same subdivision have financed with and start there.  Ask for references from people who have used the construction loan lender you are considering. Specific questions should include:

  • Did they have any problems during construction?  
  • How did the lender handle them?
  • Were payments disbursed to the contractor on time?
  • Any specific “If I’d known” tips that might make the process smoother.

Preferred Construction Loan Lenders

If the subdivision developer is promoting a relationship with a specific construction loan lender, speak with that lender. This construction loan lender will have already obtained all the materials and documentation that allow the bank to approve the development, saving you a lot of time. The developer may have also negotiated a break on the interest rates or closing costs for people who use the preferred construction loan lender. Start there, see if there is good communication, and check references.

Local Lenders vs. One-Stop Shopping

If there is no designated construction loan lender, then staying local is an important strategy. Out of town lenders might pre-approve you, but balk when it comes to a specific area or property. A local construction loan lender is likely to have funded loans in the same vicinity, will understand the nuances of the particular valuations of the area, and will know how best to get the loan closed for you.

Don’t Be a Guinea Pig

If a construction loan lender has just begun doing construction loans, move on to the next option. Construction loans require a lot of after-closing contact. New construction loan lenders may still be perfecting their workflow for disbursements and approvals. If you are one of the first, you could experience delayed contractor payments, stretching your construction schedule and possibly depleting your interest reserve before the construction is finished.

Don’t Be Left Holding the Bag

Before signing on the dotted line with any construction loan lender, make sure that its balance sheet is sound. The bank might be holding your funds for 12-24 months after closing. If the bank is in trouble, construction lines of credit could be frozen, and you could experience a construction stoppage.

Flexibility Is Key

When interviewing construction loan lenders, be sure to ask about their emergency advance policy. Typically construction funds are disbursed on a draw system that requires contractors to do a certain amount of work before issuing an invoice for the bank to approve. Being able to get an advance if any hiccup occurs during the construction will vastly improve your peace of mind.