Quick Question for those who took construction loans..

Jason143NBPDAugust 20, 2014

Ok.. So we FINALLY have gotten back all the quotes from builders and now looking to finalize financing.. We got prequalified from two banks who prequalified us for more then double of what we need.. The question is.. Who do you go with.. I tried looking into banks in my area and only found two that said they did construction loans for those that were not businesses.. They were Wells Fargo and TD Bank.. After going through the prequalification and all that we broke down the differences as follows:

Wells Fargo:
- Two closings - 1 for the construction loan and 1 for the mortgage.. This would mean we need to qualify twice and pay for two closings.. When asked about closing costs I was told that we would be "around" 10k and some of the initial closings costs "may" be able to be used towards the final closing
- Told us the current rate for a jumbo loan which would be the mortgage rate is 3.875% (that was actually a few weeks ago)
- Requires 20-25% upfront..

TD Bank:
- Single Close - Closing costs would be approximately 11,500 plus costs for points
- Said current rate is 4.563% but could purchase points to lower.. Point costs were said to be in range of 3k-3.5k. First point would lower rate to 4.313%..
- Requires minimum 20% upfront

We are now at the stage of trying to finalize who we will be using for financing.. At this point would I just have them run the numbers for exact figures for the loan? Meaning have the numbers on paper for closing costs, all fees associated, construction rate, mortgage rate, etc? Or do I actually have to have them run the application and "apply" for the loan?

Lastly, has anyone found problems with banks that do two closings? I have read some bad stories about people going with banks with two closings and having problems with the second closing.. Basically the bank finances the construction but when it comes time for the second closing and to roll into mortgage "problems" arise and the bank wants more money down or flat out doesn't approve financing the mortgage.. I was reading of people basically on the verge of losing their newly built house to the bank because of this..

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I got much better offers from local or regional banks. They tend to specialize in construction loans more so than the big boys.

    Bookmark   August 20, 2014 at 5:50PM
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Some other important questions to ask .....

Is there a penalty for paying MORE than the minimum scheduled payment?

Can paying more than the minimum lower your total long-term costs?

How fast are you allowed to pay the amount back without penalties?

Getting double what you were looking for would be nice, as that would initially make your payments worry free (since you have twice what you need, just leave a ton of it in the bank) and it also makes for a good safety net in case of minor or possibly major cost overruns ... (wife suddenly decides that she wants to splurge on a nice hardwood floor, which is a good idea in the building stages since it's hard to do it later.... or perhaps you decided to upgrade the siding or fencing or put in a pool in the back yard, ect ...)

Even so, being able to make larger payments or extra payments helps to knock down the principle of the loan, so that your interest payments are lowered. The problem for the bank is, that if the interest payments get lowered, they get a LOT less money, so some of them arrange for penalties that you'ld have to pay for making early or extra payments.

    Bookmark   August 20, 2014 at 5:58PM
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We did a one time close to lock in the current interest rate and also so we didn't risk not appraising for the right amount if we had to convert the loan. I am not that worried about either but the peace of mind was worth it. You mentioned Jumbo Loan. When we were shopping, Jumbo was a whole different ball of wax than a "normal" loan. Make sure you are comparing apples to apples.

    Bookmark   August 20, 2014 at 7:21PM
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I was going to suggest taking a look to see if either of you qualify for membership to any credit unions. They tend to be far more flexible with regard to how a loan is structured, generally offer better rates, and aren't as interested in turning a profit on their clients.

It seems wonky to me that WF is asking you to qualify twice in order to flip the loan. I thought most of the larger institutions had abandoned that model and moved toward the "construction to permanent" single-closing model.

    Bookmark   August 20, 2014 at 9:26PM
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It was 50/50 one time close vs. requalifying 9 months ago. The other reason we went the way we did was there was a 12 month option and no penalties for taking longer. Surprisingly, there are more hiccups that you could ever imagine during the custom build process. Some of the others had penalties in percentage if you went over more than 30 days or so.

    Bookmark   August 20, 2014 at 10:46PM
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You may ask the lender and make sure you check the loan documents that there is no prepayment penalty.

While permanent mortgage carries fixed monthly installation payment including principle and interest, you can pay more each month or simply have extra payments. Extra goes to principle when there is no prepayment penalty.

During construction phase, typically only interest of the accumulated draws is paid each month. I don't know if you are allowed to pay more at this stage.

In my case, I got one time closing from a local credit union without any closing cost except the final survey. The rate was 0.5% higher than the market rate for regular mortgage at that time. They requires 20% down and we had bought the land so that counts toward the down payment.

    Bookmark   August 21, 2014 at 8:31AM
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Thanks for the input.. I am going to have to sit down with each for a more detailed look into their fees as well as ask some of the questions you have mentioned.. But it looks like TD offers the one time close with the lower fee, however you have to pay to get a lower rate.. To get near the Wells Fargo rate I would have to purchase 3 points and that will cost around 9k which will put me inline with Wells Fargo two closing costs.. Wells Fargo offers two closings (which will probably be around 20k together) but has the lower rate up front..

    Bookmark   August 21, 2014 at 5:11PM
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Make sure to consider how long you will be with that loan. For us, it didn't make sense to buy down points because it would take 12 years to break even. If we still live here then, we will have refinanced I am sure.

    Bookmark   August 22, 2014 at 4:48PM
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