Custom-built financing

Custom-built homes can require custom-built loans for many buyers, and a range of choices mark the lending landscape. A solid understanding of the process, researching and then meeting with prospective lenders early and asking key questions can properly groove potential borrowers with the right loan product.

“We tell consumers to ask any question you might have and people should be happy to answer,” said Jordan Beezley, investigation manager in the real estate division of the Department of Regulatory Agencies for Colorado. “If they aren’t answering directly or are skating around the issues, that could be a red flag.”

The agency aims to preserve the integrity of the marketplace and regulates licensed professions, such as lenders, in Colorado using funding from fees. Loan shopping for new or custom-built homes parallels the process for any other loan, Beezley said, and key questions to ask include what the monthly payments will be and whether that fits the borrower’s budget. Ask about fees and interest rates, too, and compare them among lenders, he said.

New-home builders often offer in-house financing through a preferred lender to potential buyers – along with incentives such as credits for upgrades on the home – during the building process, Beezley said. A close look at these loans and incentives is needed to ensure it’s worth taking compared with interest rates and terms offered by outside lenders.

“Most buyers find a portion of the incentive disappearing in the hands of the in-house builder-lender,” said Lou Barnes, mortgage banker with Boulder-based Premier Mortgage Group.

Buyers who need a construction loan for the building process can use a two-loan system, with a short-term construction loan for the building process and a separate, permanent loan for the finished house, said Brian Larson, president of Boulder’s seven FirstBank locations. The Lakewood-based bank is a full-service bank doing both commercial and consumer lending.

Timing the completion of the new home with the end of the construction loan is important and can be difficult, Larson said. He typically adds three months to the projected completion date to account for delays caused by common sticking points, such as weather or supply-chain problems.

Once the home is complete and a certificate of occupancy is issued, then buyers move to a permanent loan, which pays off the construction loan and is similar to a more conventional mortgage. The borrower’s risk with this system is rising interest rates.

“Loan rates are awesome today … but in nine months or a year, I don’t know what they are going to look like,” Larson said.

Barnes agreed that interest rates are likely to increase in coming months.

“Build your hopes and expectation on interest rates being higher than what we have today,” Barnes said, although compared with historic interest rates, they are still likely to be relatively low.

Additionally, because of the high price of real estate in Boulder County, many custom-home loans in Boulder are large, jumbo loans. Big sums make for bigger risks to lenders, Barnes said, and such loans often have additional qualifying conditions, appraisal conditions, higher rates and more stringent down-payment requirements, as do construction loans.

For consumers interested in avoiding future interest-rate increases, single-close construction loans are available. It’s a product FirstBank has offered for years, Larson said. The benefit is that borrowers can lock in a low interest rate now. The drawback is such loans can’t readily be bundled and sold, meaning the local bank absorbs the lending risk, so such loans often are offered at adjustable rates of five or seven years, often called 5- or 7-year-ARMs.

While fixed-rate loans are preferred by many, especially with today’s rates, talking to a lender about goals and financial parameters can tease out the best loan approach for individual borrowers.

“There’s no point in having a 30-year-fixed if you’re going to sell the home or you may pay it off in seven years,” Larson said.

Lenders make little money in interest on construction loans because of their short duration, so fees and interest rates are higher, Barnes said. Additionally, the collapse of the housing market six years ago disrupted the new-construction supply chain, Barnes said, when skilled sub-contractors fled the market for other occupations as their work dried up. That supply chain, from people to materials, is just beginning to rebuild, making the timing of construction completion even more unpredictable, he said. If your loan is tied to a specific completion date, money and interest rates can be lost if the house isn’t finished on time.

“Construction loans are very risky for the bank because … if anything goes wrong with either the builder or the buyer you don’t want to be stuck with a partially built home,” Barnes said.

Despite such challenges, construction loan requests are on the increase, said Jim Hines, communications consultant for Wells Fargo Home Mortgage.

Borrowers need a lending plan in place early in the process or they risk additional delays, Larson said.

“As a lender we don’t want to cause any inconvenience to the borrower, and we don’t want to slow down the project,” Larson said. “So, the sooner the better.”