Most likely, if you purchase land in one of our master planned communities and plan on building a home, you are going to need to get a home construction loan. There are many lenders out there that will give you a home construction loan. But how do you know if the lender who you're going with is experienced? Well, there are some questions that you can ask your home construction lender to know if they're an experienced home construction lender or not.
There are generally two types of lenders, the local banks and the "national lenders". Many national lenders have home construction loan programs, but they may not have experience in your local real estate market. Your local bank, if they do offer home construction loans, might be able to offer you a better rate. And they may know your local real estate market better than a loan officer who is an employee of a national lender.
Home construction loans are more complicated than a traditional mortgage loan. You need to deal with a loan officer that has a considerable amount of experience providing home construction loans to consumers. Here are four questions to ask your home construction loan officer. If they can answer these questions without hesitation, then they've passed a pretty good test: and you should consider talking to them further about a home construction loan:
How long have you personally been involved with providing home construction loans?
Ideally, they should have at least several years' experience with home construction loans. The longer the better. You generally don't want to deal with someone who has only been doing home construction loans for a few weeks or a few days.
What is the LTC (Loan to Cost) required for home construction loans?
The LTC or "loan to cost" required for home construction loans is the down payment--the cash equity, such as the down payment on land. Typically the LTC will range from 5 to 20 percent.
Which do you prefer (which is better), a draw disbursement system or a voucher system?
Currently, a draw disbursement system is more popular because you, the borrower, has control over the money. You disburse it to the home builder when needed. Many banks do now offer a voucher system.
Does the lender require a Contingency and an Interest Reserve Account?
Typically, assuming you qualify for additional funds if you need them, lenders will offer you a choice. Many lenders will automatically add both a Contingency and an Interest Reserve Account to the loan amount.
If you ask these four questions when speaking with potential loan officers, you may get different answers from different individuals. Hopefully the home construction loan officers you're considering will know the answers to all four questions. If any of them don't, then you might consider moving on and finding a different lender.