News Home Construction Loan Financing
“Interest rates are at historically low levels right now (May 2020). So if you can, it’s a good time to move forward with a home-building project. Everyone working from home has more time to plan and think and wants me to crunch numbers and see if they qualify. They want to explore options, plan for a year down the road, and calculate how much to pay for down-payment.”
-Kayla Lea Jorgenson
An Interview with Kayla Lea Jorgenson, mortgage loan officer, US Bank
Slowly but surely, it’s coming together. You’ve connected with a local Lindal dealer, chosen a home style you like (or come up with a custom home design), and worked with your dealer and Lindal’s home design professionals to make modifications for site, budget, and lifestyle. You own a piece of land (or know which one you want to purchase), and have chosen the general contractor you’d like to work with. You’ve signed Lindal’s purchase and sales agreement (PSA).
It’s time to start building your dream home.
While some home-buyers can finance the construction of their Lindal home out-of-pocket, many apply for a bank loan—either a construction loan followed by a conventional mortgage loan, or the more popular all-in-one loan, which starts as a construction loan and rolls over into a conventional home loan once construction is complete.
Construction loans are offered by about 65% of banks nationwide.
To understand more about the loan process, we sat down with Kayla Lea Jorgenson, a mortgage loan officer at US Bank. Kayla helps Lindal clients nationwide finance their home builds.
How can you help Lindal clients with their new home projects?
I’m a mortgage loan officer at US Bank. I’ve been handling mortgages for 25 years, and working with Lindal clients for the past four years.
If a customer cannot finance their home with cash and needs a loan, that’s where I come in. I’ll work on getting the client pre-qualified and explain the process. I get the loan approved, processed, and closed, and then it goes to the construction department. The money is placed in an escrow construction account with periodic (usually monthly) draws taking place throughout the construction phase (usually 12 months).
How do Lindal clients contact you?
Dealers either call me or give their client my contact info. The dealer will send me all the construction exhibits, the contract (Purchase and Sales Agreement, or PSA), a cost breakdown and description of materials, plans and specifications. Sometimes, the dealer is the builder. Other times, the dealer will help the client find a general contractor, who also needs to get approved as a builder for the project. The general contractor provides their own contract and cost breakdown. We add them together to get the total cost to construct.
How is the loan amount determined?
Once I have all the exhibits from Lindal and the general contractor, I forward these to the appraisal desk, where they are assigned to an appraiser. The appraisal process has two parts. First, the total cost to construct— known as the acquisition cost. Second, the appraised value of the new home once construction is complete, based on comparisons of other recent home sales in the area.
We take the lesser of the two values for mortgage purposes, in order to determine the maximum loan amount.
What kind of loans do you offer?
We offer construction-to-permanent loans, also known as all-in-one loans.
During the construction phase, the borrower makes interest-only payments based on the amount they draw each month. During the last month of construction—after the occupancy permit is issued—the loan automatically rolls over to a typical home loan, with monthly principal and interest payments. Any money left over in the construction account is applied toward the principal.
Why do you recommend an all-in-one loan?
The benefit to this all-in-one approach is that there are no additional closing costs once construction is finished, and no other fees or underwriting. The loan and deed of trust is already done. Also, the interest rate is locked prior to the construction phase. If rates go up during any part of the process, it doesn’t affect the customer. In the event that rates go down, you can always refinance later.
Is now a good time to finance a new home build project?
Interest rates are at historically low levels right now. So if you can, it’s a good time to move forward with a home-building project. As a larger bank, we are able to offer very competitive rates on our loans.
This is a good time to start. Right now, people are preparing and planning and getting permits. Everyone working from home has more time to plan and think and wants me to crunch numbers and see if they qualify. They want to explore options, plan for a year down the road, and calculate how much to pay for down-payment.
A lot of people are calling to get pre-qualified. I think we’re going to have a bit of a boom come late summer.
Can I use my land as collateral for a loan?
Any money you’ve put in on the purchase of a lot is put toward your down-payment. If you purchased a lot for $100,000, then you have $100,000 toward your down-payment. When a construction appraiser goes out to appraise a project, there is a line item in the acquisition cost appraisal that shows the appraised value of the land. We also factor in any appreciation that’s taken place if you’ve owned the property for more than a year.
If you own your property free and clear, you can use the value of the property toward your down payment (usually about 20% of the total).
How do do I get approved for an all in one loan?
We look for several factors:
- A credit score of 680 or higher
- A debt-to-income ratio of 45% or less
The home must be either owner occupied or a second home, it cannot be used for commercial purposes. Most of our loans are for 30 years but we do offer adjustable rate mortgage (ARM) options as well.
What if a client is retired?
If someone is retired we count income from social security, pension plans, and other sources.
What’s your favorite part of the job?
Seeing the home when it’s completed, especially if I get invited to see it! I’ve closed almost 1,800 loans, and I ask every single person if I can come to their housewarming party.