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 VCassano@BrentwoodBank.com or (412) 409-9100 ext. 285.