Financing in Prior Lake>Question Details

Jim, Home Buyer in Prior Lake, MN

Is it a normal practice for a builder to have the buyer obtain the construction loan?

Asked by Jim, Prior Lake, MN Thu Aug 30, 2012

We are looking at building a new house and the builder has said I need to obtain the construction loan. They have some "preferred lenders" that will allow me to obtain a construction loan with the down payment I was planning on doing and convert it to a permanent loan in the end. However, another mortgage broker has informed me that this isn't a standard practice and the builder should be completely in charge of the construction loan and I'm just responsible for the permanent loan in the end. Who's correct?

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Dan gave a great answer there. Typically if the builder already owns the lot and it is a large sub-development they will already have financing in place.

If you are just buying some random lot in Prior Lake, or working with a mom & pop builder ( I know a couple) then you bet the financing is your responsibility.

But can I please point out AND STRESS that this should not concern you Jim about the transaction. I know a lot of local builders in the twin cities that are damn good at what they do, but just got hammered in the recession. The truth is that for many builders they just can't get the financing like they used to.

What matters the most is you having complete and utter trust in the builder you are working with. The financing will be very easy.
2 votes Thank Flag Link Fri Aug 31, 2012
There is nothing wrong with it as long as the builder is solvent. Ask your lender to run a title check and help obtain a credit check on the builder. Those are things that would not take place if you obtain the construction loan. Good luck,

Jim Simms
NMLS # 6395
JSimms@cmcloans.com
Financing Kentucky One Home at a Time
1 vote Thank Flag Link Fri Aug 31, 2012
Jim,
If you are building a custom home, or a spec home on a separate lot not part of a development, my experience is that you would be responsible for obtaining the construction loan. I did a few of these when I was a licensed lender and you must work with your builder on a developing the plan into various phases including the timeframes for each one for the lender to fund each aspect of the construction project.
If you are buying a home in a new development, the builder will have established a loan for the project and you will only need to arrange a final loan upon completion.
There are, or at least used to be "one loan" construction to permanent building loans where portions are paid at various milestones and the final loan is set upon completion. Speak directly to a couple local lenders about the current options available and what you may qualify for.
1 vote Thank Flag Link Thu Aug 30, 2012
Jim,
It sounds reasonable, but since I'm not in your market get some local opinions to back yourself up. Are you using an agent? Hopefully you have your own agent who can advise you and make some good referrals.
Check the builder's reputation and licensing too. During the crash there were horror stories of builders using money from one project to keep another afloat only to have everything collapse. Most of the shaky ones are gone now, but it wouldn't hurt to investigate a bit further.
Flag Sun Sep 2, 2012
Thanks for the quick response! The builder is the exclusive builder for this specific lot and they've built most of the homes in the development. I'm not sure if they technically own the lot or have an agreement with the owner of this lot. So I think this would kind of fall under the "separate lot not part of a development" you talked about.

The builder is going to cover/reimburse me for costs and interest associated with the construction loan, but I have to obtain the construction loan under my name. They gave me a list of preferred lenders that they have worked with and can provide me with the construction loan and permanent loan at my downpayment amount. One of the preferred lenders they put in me in touch with has a "One Time Close" loan, which I'm leaning towards because of the reduction in closing costs with only 1 closing.

I just wanted to make sure this is a normal practice and I'm not getting tricked or something.
Flag Thu Aug 30, 2012
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0 votes Thank Flag Link Sun Nov 15, 2015
Either way it is done the somewhat minor cost of construction financing is a charge that you will bear. If the builder does it, the end cost of your home will be affected.

I have been in the mortgage business over twenty years, and the lenders that tell you that this is an unusual practice are only saying so because they may not be able to help you with it.

A partnership with a source for construction financing is the best way to fulfill this need.

Trace Hawthorne NMLS#876516
Waterstone Mortgage Corp
612-245-4497
0 votes Thank Flag Link Fri Mar 14, 2014
It is common with smaller builders. Most large builders will carry the construction loan for you. So, it turns out that neither is correct, it is just a matter of builder you choose.

Best of luck Jim!
0 votes Thank Flag Link Wed Jan 30, 2013
Since the market crash a few years ago most banks and lenders look for the buyer to put up 20 to 30% of the sales pricet to begin construction. This is usually a sizeable amount of $$. You can get around this by purchasing a new prebuilt home from a national builder or you can search local builders and see if you can find one financially strong enough to carry the construction loan or build the house from their personal finances. I know of one such company. Check out http://www.threedownhomes.com.
0 votes Thank Flag Link Tue Sep 25, 2012
You might look at the possibility that the Builder is just getting a Kick-Back for locating the Loan:

Good luck and may God bless
0 votes Thank Flag Link Sun Sep 2, 2012
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