As a mortgage loan officer you will come across a wide variety of situations that borrowers find themselves in when looking for a new home. Clients who want to build their own home will have a unique set of challenges facing them and you will have to guide them.
Here is what you need to know about construction loans and how they affect your clients.
There Are Two Types Of Construction Loans
There are two types of construction loans that you should be aware of and how they affect your clients:
- Construction-to-permanent, you take out a loan to pay for the construction of the home and when you move in, the loan balance is converted into a permanent mortgage.
- Standalone construction, you have essentially two loans—one to pay for the construction and another mortgage to pay off the construction debt.
Talk with your clients about their plans for the home and how each option will affect their finances. Let them know that not every loan is the same from person to person and discuss how each loan could affect them.
You Will Need A Construction Timeline
Before you can approve a construction loan for a client you must obtain a timeline of the construction. This is essential because the right builder will meet building timelines so the funds you provide them via the construction loan will not be misused.
They’re Harder For Borrowers To Qualify For
There is a lot of trust needed between a builder and you, the loan officer, before a construction loan can be approved. To protect yourself in the interest of avoiding a bad investment if things go wrong or the home cannot be built, you must let borrowers know that these loans tend to be more difficult to qualify for as they come with a strict set of requirements.
For example, they must have good credit, their builder must be qualified, have the ability to put down a significant down payment, and the proposed home’s value must be appraised by an appraiser.
Once you have completed credit approval and the review of the builder and construction project is complete, an underwriter will issue a final approval before the loan is closed.
The above information is for educational purposes only. All information, loan programs and interest rates are subject to change without notice. All loans subject to underwriter approval. Terms and conditions apply. Always consult an accountant or tax advisor for full eligibility requirements on tax deduction.