There are numerous mortgage lending
options available today, but not all
lending solutions are viable for executives who want to build a home from
scratch. How flexible and attentive is your
lender? If you were to design and build a
home, would your bank provide a seamless
loan process and personalized service?
The fact is, purchasing existing real
estate and building a new home are two
completely different and unique undertakings — and the latter requires a specialist
who can usher time-pressed executives
through the construction process, offer private client service and, most importantly,
ensure privacy.
Vince Cassano, assistant vice president of
Brentwood Bank in Bethel Park, Pa.,
explains the value of a portfolio lender,
how construction loans work and why a
hybrid construction-to-permanent mortgage that provides a fixed, locked-in rate
up front will save executives extra closing
costs and streamline the application process and servicing.
“A lot of big banks offer construction
loans, but then you have to go through the
closing process again to convert this loan
into a permanent mortgage,” Cassano says.
When purchasing new construction, it pays
to seek out a lender that can accommodate
this niche and serve as a point person.
Smart Business asked Cassano to
explain why new construction deserves
special treatment, and how tailored mortgages for custom homes make good business sense for everyone involved.
First, explain the difference between a construction loan and conventional loan. Won’t
the first cover an entire building project?
Actually, no. This is where many people
get confused. Conventional loans require
20 percent down; the bank finances 80 percent of the value of what is being purchased or built. Conventional loans apply
to both new construction and existing real
estate. A construction loan is a short-term,
interim loan that covers costs of building
the home. A builder takes ‘draws’ to continue progress on the home, and these
draws are funded by the construction loan.
But, once construction is complete and the
owner takes occupancy, this loan must be converted into a permanent mortgage. This
means two closings, double the fees and
twice the paperwork and hassle. Essentially, you must finance your home with
two separate loans. Ideally, the owner
should seek a lender that will provide a
construction-to-permanent loan.
What is a construction-to-permanent loan,
and what type of lender provides this option?
A construction-to-permanent loan is a
product that portfolio lenders can offer. A
portfolio lender typically holds loans until
their maturity (or until they’re paid off) and
is not looking to sell them to investors in
the secondary market. This helps ensure a
higher degree of privacy, since the borrower’s information will not be circulating any
more than is absolutely necessary. And
since the portfolio lender typically is not
selling the loan to another party for servicing, and the lender will service both the
construction loan and permanent mortgage, borrowers don’t need to do twice the
work and pay double the fees for closing.
The transition from construction loan to
permanent mortgage happens in-house.
Is a construction-to-permanent loan serviced
by a portfolio lender also advantageous for
the builder?
Absolutely. Once construction begins, the
project will require monetary draws to
keep the process moving along. The
builder needs to pay suppliers and laborers
and finance the work-in-progress on a continuous basis. To do that, the builder can
contact one person directly at the bank
rather than dialing an 800 number and getting the run-around. This is a key benefit of
working with a portfolio lender — you gain
a financial team member, and your builder
can count on calling the bank for a draw
and receiving the check, often within 24 to
48 hours.
Also, when the home is complete, the
builder knows that the owner’s occupancy
of the home will not be further delayed by
the process of obtaining that permanent
mortgage — the transition from construction loan to permanent mortgage is seamless.
What qualities should an executive seek in a
portfolio lender?
It’s important to partner with a lender
that has relationships in the construction
industry. Your builder will recommend
which suppliers are the best in their fields
for roofs, carpeting, cabinetry, etc. But, can
the builder also recommend a bank that
will expertly handle niche construction
loans? Before entering in a relationship
with a bank, find out which construction
companies the lender typically works with
and ask for references.
Before entrusting your business with any
lender, find out whether the bank works
with custom builders. Ask what will happen to the construction loan after the home
is built. (In other words, will you have to
‘reapply’ for a permanent mortgage?) Find
out who will communicate with you and
with the builder throughout the process.
We recommend a portfolio lender who has
direct contact with all involved parties and
a deep understanding of the construction
market.
VINCE CASSANO is assistant vice president of Brentwood Bank
in Bethel Park, Pa. Reach him at [email protected]
or (412) 409-9100 ext. 285.
