How to Finance Your New Home Construction Project
Q&A with Lending Expert Mike Frankovich
Building a new home on your lot choice is a gratifying experience, but before the shovel hits the ground, the financing has to be in place. As a borrower, you have lending options that vary depending on your personal situation. So how do you go from empty lot to dream home? And is a construction loan the best choice?
If you’ve already found an ideal site and met with a Walters Homes sales representative who will build your dream home, then your next likely step is to meet with a lender. We asked financing expert Mike Frankovich, vice president and sales manager at OceanFirst Bank in Toms River, to address some of the often-asked questions by borrowers. As a Walters Homes preferred lender, OceanFirst is a hands-on bank that works closely with customers to make the financing process go smoothly. Since Hurricane Sandy hit the Jersey Shore in 2012, OceanFirst has originated an average of $40 million per year in construction loans to homeowners in Monmouth and Ocean Counties. For more information, visit Michael Frankovich’s Website or contact him at 1.888.623.2633 ext.7202.
Q: How does a construction loan work?
A: A construction loan is a revolving line of credit secured by the equity in the project. Unlike a traditional home loan, which is paid out in one lump sum at closing, construction loans are paid out in increments, called draws, tied to certain milestones in the construction process. It’s important to note that the bank’s disbursement schedule is different than the builder’s. The bank pays the customer and the customer pays the builder. When working with Walters Homes, their payment schedule is spelled out — 10% down at contract signing, 10 % upon receiving the permit, 25% at completion of framing, sheathing and roofing, 25% at completion of mechanicals, 20% at completion of trim, paint, cabinets and vanities, and 10% (or balance) at closing.
Q: Which type of loan works best for land acquisition and new home construction?
A: One of the most useful financing tools we make available at OceanFirst is an All-in-One Loan which bundles the purchase of the land with the cost of construction. Then once the house is deemed complete, instead of two separate loans, you can transition from a construction loan to a permanent long-term loan of 30 or 15 years.
Q: Can you explain the benefits of bundling a loan?
A: There is one closing instead of two which saves time and money. Also, borrowers are able to lock-in an interest rate that stays with them throughout the loan. Maximum time frame on the construction portion of a loan is 12 months. Walters Homes typically completes construction within six months. Once the house is completed, a certificate of occupancy is issued by the local zoning body, and then we release the remaining funds from the loan. At that point, the loan will convert and amortize for the duration of the loan.
Q: What do banks look for when considering a loan application?
A: Lenders are looking more closely at borrowers today. The first thing to do is to prequalify so that you’re ensured that you will have sufficient funds to complete the project. A prequalifying exercise will determine your credit rating, and our bank insists on a minimum score of 680. Since construction loans are more capital intensive, banks generally want borrowers to have 20% in reserves as part of the prequalification process. Underwriting ratios have come down to earth in recent years, and at OceanFirst we feel a 45% debt-to-income ratio is the highest ratio a borrower should have to get a qualified loan.
Q: Are there other important criteria for banks?
A: “As a lender, we want to protect our customers. I always tell people that if we’re going to do this loan, we are going to be partners, and this includes the builder because we want to get to the end. Nobody wants a halfway built house. To make sure they plan to work with a qualified builder, we ask for their license, insurance and trade references. If we are comfortable with the builder then we will fund the project. We actually have a short list of builders that we don’t want to build with because they’re tangled up in lawsuits. We’ve worked with Walters Homes for decades and they’re a qualified builder with an established home-building reputation.”