A quick reference guide to assuring a smooth start to your construction project
- Written By Bart Taylor; RiverWood Bank - Crosslake
So you’re thinking about finally building that dream retirement home at the lake, you have your plans picked out (down to the accent tile color), the building contract has been executed and your contractor , Bob the Builder, just needs the go ahead from you to fire up the track hoe that is already parked at the job site…
Here’s what you’re thinking “Maybe now is the time we should start working on getting a construction loan? Naw, why rush into things, we are still sitting on a decent amount of cash we have saved (enough to get us a good start) and the equity from the home we are selling in the cities most likely will be available prior to completion. No sense paying any more interest to the bank than we need to- right?”
You need to choose your banker and get your financing strategy in place long before the construction contract is signed and the builder is ready to break ground (You notice I highlighted strategy didn’t you? It’s not just a loan). The reason is title insurance and Minnesota lien law…I won’t bore you with the details but suffice to say you will create a mountain of additional paperwork, and unnecessary stress for you and your builder trying to schedule your project by not having the construction financing in place prior to the start of construction. Oh…and even if you have a good amount of cash to get started you risk delaying your project and move in date by not taking my advice.
You should make contact lenders (why not talk to a few?- find one that makes you comfortable) to develop a strategy for the financing of your project around 75 days prior to your anticipated start date. It takes in a perfect scenario about 45 days in this day and age to get title work, sworn construction statements, appraisals, insurance and ultimately the financing in place prior to start. Again, it’s imperative to have the mortgage signed and recorded prior to any work on the project being started.
What will the lender need?
Expect to be asked for:
- Copies of Driver’s licenses
- A loan application (one will be provided for you – it’s free, like a court appointed lawyer)
- Verification of income
- 2 years most recent income taxes (the whole shebang not just the first two pages)
- 30 days’ worth of your most recent pay stubs
- Business taxes for 2 years if self-employed (include the K-1’s also)
- Many times it is easiest to contact your CPA and have them communicate directly with the banker – they speak the same language and can more efficiently trade sensitive documents – all they need is your permission
- A builders risk insurance policy (your homeowners insurance agent will help you with this one- if you don’t have a local agent ask your builder or lender for a few names)
- Plans, specifications, a sworn construction statement and an executed contract from your builder (if the contract hasn’t been executed yet, get the first three to your lender as early in the project as you can the contract can follow…I by the way, f your builder turns up his/her nose or looks puzzled when you ask for these 4 documents – immediately call your lender, you may want to find a more reputable builder, they will give you names of quality builders in the neighborhood that “do it right”.) These items are necessary for the appraisal to be completed accurately and should be as detailed as you can get them- it’s no fun to find out at the end of the project that the “bar napkin bid” you got didn’t include a kitchen.
- 2 months most recent bank statements
- Most recent brokerage and retirement statements
- Title insurance, or abstract on your lot if previously owned
- Property tax and insurance information on all properties that you own (this is new stuff that the banks are required to have on file to demonstrate that they calculated your “ability to repay” the loan prior to consummation
I know, it seems like a lot of stuff to have to gather up. Compare that to the disappointment and anguish that would occur if you have not been properly pre-qualified (by a reputable lender) that knows what it takes to meet the exhaustive secondary market lending standards. Having that dream home already built could become a real nightmare. Do your construction borrowing homework ahead of time and don’t allow those high tension moments to dominate the choice of tile accents.