Every business needs a sales force, as they are the ones who find the clients. Without clients, we all know what happens to a business. At a bank, the sales person is called a loan officer, and it's their job is to drum up business for the bank.
The loan officer sits down to meet with you and tells you about all the great options they have for loans. They give you an application, ask you to bring in all your supporting documents, and make it sound pretty positive at that first meeting.
But the loan officer doesn't really get to decide—that's up to the underwriter. They're the ones who will look at your file and decide whether or not to make a loan.
Like any other organization in a broader industry, banks have niches. As a home builder, we have relationships with several banks whose niche is doing construction loans for builders and for individuals.
Having dealt with many banks over the years, I thought I would pass along some wisdom about finding the right bank for your construction loan. This wisdom actually comes to me from a banker I've worked with for years, whose judgement and industry knowledge I trust.
What Should You Ask Your Banker?
Assuming you're planning to build a home on your land, here are the two questions to ask any banker and why you should ask them.
1. Does the bank have to follow the Fannie Mae and Freddie Mac guidelines?
If the answer is yes, the bank may be limited in the total dollar amount of loans they can make for homes built on rural land. It's an overall limit for the bank, not necessarily a limit on the amount of an individual house.
That means the loan officer who is offering that great deal (low rate, low closing costs, whatever) might not be able to actually make you that loan.
By asking this question and telling the banker why you're asking, you might save yourself a couple of weeks. You can find out if you're going to get a "no" right away rather than having to wait two weeks and hassle with all the paperwork.
2. What conditions apply to that high loan-to-value offer?
Often times, a banker might suggest he or she can lend you 95% or even 100% of the appraised value of the home on a construction loan. Sounds like a great deal, right? That means you might not have to be out any cash at all (or very little).
The deal is valid, but it might have several contingencies attached. For example, it might require that you own your land or have owned it for some time. That means if you intend to buy the land with proceeds from your loan, you won't get the high loan-to-value (LTV) that brought you into the bank in the first place.
If the high LTV is what attracted you and you aren't a good fit for that particular loan program, another bank might be a better fit for your situation. You don't have to stay with the first bank you talk to! Explore your options and find one that's a good fit.
Be Sure to Shop Around
When meeting with different banks, be sure you ask detailed probing questions. Don't be intimidated by the fact that you aren't well-versed in construction loans—nobody but the banker is. Keep in mind that the banker isn't well-versed in whatever you do for a living either.
Make sure you find a bank that's the right fit for your particular situation. Your builder can help you with that, as he probably has many banking relationships and can introduce you to just the right one.
