Before becoming a construction loan expert, it is important to have a basic understanding of what they are and who they serve. In simplest terms, a construction loan is a loan product with a fixed term (usually 12, 15 or 18 months) that allow the borrower to build their home. Individuals must qualify for the loan with their FICO score, liquid assets, and other lender-related criteria.

From this point on, a construction loan can go into a variety of directions. For example, some borrowers may choose a General Contractor to build their home. If this is the case, the lender may require a resume from the builder - along with a credit check. Or, the borrower may want to hire a project manager to control the process. A third, and growing sector, involves borrowers acting as the builder of their dream homes. This is referred to as being an “owner-builder.” It is ultimately up to your borrower how they plan on building their home. However, the direction they choose will affect their choice of loan programs, qualification, time to build, and overall cost to build.

Regardless of which option the borrower chooses, it is important to ask questions. The biggest mistake made in construction loans is not understanding the goals of the borrower. For example, if your borrower is building this home to sell (referred to as a “spec” home) qualifying them for a loan with a prepayment penalty will not serve their needs. Or, if the borrower is building in an area with a lengthy permit process (2-4 months), setting them up on a six month construction term will guarantee angry call backs! Some borrowers are motivated by rate, others by term, cash to close, etc. By understanding your borrower’s motivations, you can offer them the best loan product to meet their needs.

Borrowers must also understand construction loans are risky. Not everyone who embarks on building their home is successful – and the last thing the bank wants is to take back a half finished home! Because of this, interest rates on construction loans are higher than traditional purchase or refinance loans. In addition, many construction loans are referred to as “construction-to-permanent” loans. This means that when the home is finished, the borrowers simply modify to the permanent financing of their choice with no additional closing costs. Most borrowers prefer this type of loan because it saves money in regards to closing costs.

To become a successful construction loan expert, you have to engage the borrower and discover their motivations. At the same time, you also have to explain (and sometimes re-explain) facets of the loan. Most borrowers you will encounter have never built a home before and are accustomed to standard purchase loans. The moment they look at the Good Faith Estimate (GFE), and see $12,000 in closing costs, they may go into a panic. Why? Because they do not understand the $12,000 includes the closing costs for the construction loan AND permanent mortgage. This is just one example, but many construction loan deals can be lost by not explaining the details of the loan to your borrowers.

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