Flashback — The Lender, part 1

We knew from the start we would need a construction loan.  Our cash and investments would get the project started, but we did not have enough equity in our current house to cover the rest.  We also knew we would probably need to pay off the lot loan.

The builders all thought this would not be a problem.  Our concern was that we were still in the aftermath of the real estate crash that started in late 2007.  Credit was still tight, and lenders were still being extremely cautious.  Construction loans are inherently more risky than mortgages on complete houses.

After our decision on the builder in 2010, we were aiming for an April 2011 start date.  We started the loan application process in early February.

We talked to one lender that the builder recommended.  The loan officer was friendly but somewhat pessimistic, and we did not apply to them.  We picked up one important fact; as for a mortgage, the lender requires an appraisal of what the house will be worth, based on the house plans.  This is inherently more speculative than appraising a completed house.  The maximum loan amount would be 80% of the appraised value.

The builder also told us of another lender that would give a construction-to-permanent loan.  This was attractive as it would save us closing costs for the final mortgage.  We started working on the application in February.  The paperwork requirements were daunting:  they included statements from every investment we had (whether or not it would be used for the house), tax returns, income statements, etc.

One item we needed was the signed construction contract.  We got the builder’s contract in late February.  There were a few clauses that I found confusing, so I had it reviewed by our settlement attorney.  He was not familiar with construction contracts, and had more questions.  The builder was OK with us modifying the contract.  It took a couple of weeks, but by mid-March we had the signed contract.  We then delivered what seemed like a small mountain of paper to the lender with the application.

At that point progress slowed down dramatically.  The loan officer wasn’t great about giving us updates unless we called.  There were committee meetings that were scheduled and then rescheduled.  Finally, they came back with what one bank was willing to lend:  significantly less than what we needed.  They had not even ordered the appraisal.

The loan officer said not to worry, they had other banks that might do better.   Then, nothing for a few weeks.  We figured it was time to look at other options.

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