The Construction Loan Process

The key to a positive home-building experience is understanding the construction process and how a construction loan works. With this in mind, we are sharing these six basic steps to securing a BankWest construction loan and ultimately converting it into a permanent mortgage.

NMLS #685987

Step 1: Pre-Approving Your Permanent Mortgage
Step 2: Choosing Your Contractor, Building Site and Floor Plans
Step 3: Closing on Your Interim Construction Loan
Step 4: Drawing From Your Loan and Monitoring Outstanding Balances
Step 5: Locking the Rate on Your Permanent Mortgage
Step 6: Closing on Your Permanent Mortgage

Step 1: Pre-Approving Your Permanent Mortgage

Your financing package will actually include two separate loans.

1. The initial interim construction loan allows for advances or “draws” to pay for building expenses during construction or remodeling. Interest is paid monthly on this loan and it has a maximum term of 12 months. It is important to work closely with your lender during this time to assure a smooth transition between loans.
2. Once your home is built, a permanent loan or “mortgage” will be made to pay off the interim loan. The mortgage will be paid back monthly for a period up to 30 years.

The first step in building your dream home is meeting with your BankWest lender to determine how much you can borrow for your construction project. BankWest requires that you pre-qualify for your permanent mortgage before the interim construction loan is considered. To pre-qualify, you must demonstrate that your income will cover loan payments, closing costs and other loan expenses. In addition, our lenders will look at any existing debts you may owe and your down payment amount. Please keep in mind, there are loan programs available that allow borrowers to buy or construct a home with small down payments. Eligibility and requirements will be based largely upon financial and credit history. Based on your individual situation, your lender can explain your options.

To pre-qualify for a loan amount and purchase price, you must provide the following information for each applicant, as well as a completed mortgage application:

• W-2(s) for the last two tax years
• Recent pay stubs covering the past 30 days
• Tax returns (both personal and business) for the most recent two years, with all attachments
• Most recent bank and investment statements, showing funds available for closing costs and down payment

Additional information may be required, but the items listed above should provide a strong indicator of what you can afford to borrow. Finally, BankWest will request a credit report for all applicants to help determine a maximum loan amount. When all of this paperwork has been completed, you will receive a “good faith estimate” and a fees worksheet showing construction loan and permanent mortgage costs, based upon that loan amount.

Please keep in mind that financial changes during the construction loan process may impact your eligibility for permanent financing. Those changes may include: your employment status, decreased income, increased debts or late payments on your credit report. If you have any financial or employment changes during the term of the interim construction loan, it is very important to work with your lender to assure that you have an updated plan for the permanent financing.

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Step 2: Choosing Your Contractor, Building Site and Floor Plans

Now the fun begins! It’s important to choose a trusted home builder to help you create a floor plan that will meet your current and future needs. These needs should be considered before the first nail is driven, as changes during construction can result in costly change orders. A reputable general contractor should know all of the costs associated with your building project and will ensure all expenses are included in your total construction cost. BankWest requires only one written bid, but you may want to get at least two bids from comparable contractors.

Finding your perfect building site should also occur during this time. We know you will be anxious to get things started, but there are a few things to remember when selecting and/or preparing your land for the project:

• Site preparation, including tree removal, cannot begin before closing on the interim construction loan.
• Proof of builders’ risk insurance must be provided before closing on the interim construction loan. Ask your lender about obtaining a quote from one of our experienced BankWest Insurance agents.
• All utilities, wells and septic tanks must be located within the legal description you are building upon.
• Other homes located on the property must be removed during the term of your initial construction loan.
• The property should generally be no more than 10 acres. Please ask about exceptions.
• If the lot is being surveyed from a farm or larger acreage, the steps required to get the new legal description approved by the county can take several weeks. Please plan accordingly.

Once your floor plans are completed and building site has been secured, an appraisal will be ordered to determine the market value of your home. BankWest will require the following information to complete the appraisal:

• All house plans and specifications.
• Bids from your builder.
• A purchase agreement or deed for the land you plan to build upon.

The appraiser will also visit the building site and use comparable sales information to determine the fair market value of your home. This value will help set the limits for your interim construction and permanent mortgage loans.

When the appraisal is completed and final costs are determined, BankWest will order the title work and approve your interim construction loan. The next step is closing that loan and beginning to move some dirt!

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Step 3: Closing on Your Interim Construction Loan

When it’s time to close your construction loan, we will meet at the bank or title company to complete the necessary paperwork including a note, mortgage and other disclosures. If there is a lot loan, it will be paid off at this time. If you are ordering a manufactured home, modular or system-built home, BankWest can now disburse necessary funds for the down payment and your new home can be ordered. Generally, closing costs must be paid by the borrowers at the time of closing and cannot be rolled into the construction loan.

BankWest construction loans are generally written for a period not to exceed 12 months. During that time, you will be required to make monthly interest-only payments on the amount of the construction loan you have secured. This interest will be due on the first of each month.

BankWest may elect to have on-site inspections done on certain construction loans during the building process. This is simply an internal audit and in no way should be construed as monitoring for building code or construction adequacy, quality or accuracy. Certain government guaranteed or insured loans may also require inspections. We will provide you with more information if your loan is subject to these inspections.

After the initial construction loan is closed, the builder can begin construction.

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Step 4: Drawing From Your Loan and Monitoring Outstanding Balances

Once a month, you should pay your construction bills using a “draw” from your loan. It is your responsibility to track invoices and submit them to the bank. With each draw request, you may present as many invoices as needed.

When submitting construction bills, please note it takes about 72 hours to provide you with the checks. Please plan accordingly. Depending upon the location of your project, these checks may be cut from a title company or from BankWest. By submitting the draw request, you are agreeing the work has been completed and the contractor and suppliers will be required to sign a lien waiver for each payment they receive. This documents the contractor has received full or partial payment and shows a lien cannot be filed against the property for the completed work. It is important to provide information regarding all costs, including bills you pay out of pocket. You will be provided forms to report this information and you may be requested to get lien waivers for the items paid directly by you.

After each draw request is complete, we will provide you with an updated statement showing the total draws to date, along with the remaining loan funds available for construction. If at any time you are concerned the remaining funds are inadequate to complete the project, contact your lender for a financial review.

Remember, no changes can be made during construction without notifying the lender, as it could affect the home’s appraised value. Changes include things like adding or removing a garage stall, finishing a basement, etc.

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Step 5: Locking the Rate on Your Permanent Mortgage

You’re almost done! All of the remaining costs and expenses have been tallied. Your general contractor submits a final bill. You and the lender agree upon the final loan amount. What now?

Interest rates may be locked up to 30 days before your home is completed, but you must know the final loan amount. This may require a final bill from your contractor. It is good to contact us near home completion so we can discuss timing and rate lock options with you. You will most likely choose to do a rate lock with a 60-day expiration. *

When you meet with us to discuss locking the permanent loan rate, we will update your income information, request new bank or investment statements and order a new credit report to review current debts. Be sure to save your paystubs, as well as bank and investment statements, during the construction loan process to make these easier to find when the final permanent loan information is being compiled.

When your home is finally completed, we will need 30 days to update your file and close the permanent financing. During this time, an appraiser will reassess the home’s value. In addition, any final inspections required for financing will be performed. If a survey was not completed during construction, we will order the final survey showing that your home was built inside the legal description (a requirement by the title company). Finally, the necessary title work will be updated to show there have been no liens filed against the property since construction began. Your BankWest loan officer will then submit your permanent financing application, along with the appraiser’s final inspection report and photographs, to underwriting for final loan approval. BankWest does most underwriting in-house. Underwriting must give final approval to complete your permanent loan.

*Extended lock programs are available for new construction loans. Additional fees may be required. Ask your loan officer for details.

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Step 6: Closing on Your Permanent Mortgage

Your permanent loan is now approved and a time/date has been set for signing your permanent mortgage papers. When this occurs, your interim construction loan will be paid off with the permanent mortgage. The title company will finalize this portion of the process, and will provide the necessary title coverage required for BankWest to sell the loan on the secondary market (assuring you the best loan rate). You will be provided a settlement statement from the title company which shows you all of the financial details of the permanent loan closing.

Finally, you are finished. The home is built and the keys are yours!

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