Securing the financing to build a house is a different game than getting a mortgage to buy an existing home.
Residential construction loans can be more difficult to find, are more complex to manage and have more variables than traditional mortgages. You’ll probably need a professional to help with the process—that’s where a construction loan broker comes in. But how do you find one, and make sure they’re qualified?
Why you need a construction loan broker
There are two main types of construction loans: Single-close loans (sometimes called construction-to-permanent) loans, and two-step loans (sometimes called standalone construction loans). The former finances both the parcel of land and construction of the house, while also serving as the financing vehicle for the home’s ownership. The latter finances just the acquisition of the lot and the construction, and is then refinanced into a more traditional mortgage once the home has been built.
Many banks, credit unions and mortgage brokers used to offer construction loans nationwide. But the real estate downturn of a decade ago left many lenders high-and-dry with half-finished properties, so the landscape is different today. Borrowers have more limited options, as most lenders only service construction loans in their own geographic area.
What’s more, the process of applying for a construction loan requires more time, resources and documentation than a traditional mortgage. Lenders investing in an as-yet-unbuilt structure will want good assurances about the borrower and the contractors, as well as a hefty down payment of at least 20 percent. A good construction loan broker can help you with all of these, and can also shop around to help get you the best rates.
What makes a good construction loan broker?
To navigate the process and find the right lender, you’ll want a broker who has deep knowledge about construction, safety codes and other legal requirements. You’ll also want to find someone who’s a good listener and communicator, who can take note of your particular needs and tailor then to the requirements of various lenders, while keeping you apprised of different loan options.
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It’s important to work with a broker who knows both the local lending landscape and the local home building market. A broker who is familiar with contractors and construction firms and can offer tips and tricks for saving money, while keeping the project up to code.
A knowledgeable and well-connected construction loan broker also can help make sure banks are willing to offer you the best deals—not to mention helping you sort out what can be a complex array of loan types, and educating you about the details of buying a residential lot and hiring qualified contractors.
How to find a construction loan broker
Since construction loan brokers tend to work locally, word-of-mouth is often the best way to find a good one. Beyond asking around among friends and neighbors, you can also check in with area banks and credit unions that offer construction lending, or with local builders and contractors who may have their own preferred brokers. Your local chamber of commerce may also have some suggestions of its own.