This post originally appeared in the Seattle Times.
Today, we’re hearing from Susan D. Henry, the vice president and Lynnwood branch manager for Washington Federal—now known as WaFd Bank. In her career as a lender, Susan has worked to educate customers about the lending process, with a specialty in construction loans. Take it away, Susan.
Starting a home remodel can feel overwhelming or confusing (there’s a lot to consider!), but if you break it down, the process can be more manageable. Step one is to do your research and establish your construction team (lender, builder, and architect). This group of people will be a part of your life for a long time (sometimes as long as 12 to 24 months, depending on the complexity of your remodel), so it’s important to have good communication and trust with the entire team.
After the initial excitement of planning your dream home with your architect and builder, you face the financial question: “How am I going to pay for this?” It’s at this point that it’s time to meet with a reputable lender who specializes in construction loans. (There aren’t many lenders in this field, so narrow down your options, then choose one.) For a remodel, look for a lender able to do a “construction-to-perm loan,” which is a one-time close option. A construction-to-perm loan provides funds for the construction duration of the remodel, and then converts to the permanent loan without the need to refinance again.
Once you’ve identified a lender, interview loan officers (each lender has loan officers working for them; loan officers meet with applicants to help manage the application process) to identify one who conveys the lending process with knowledge, experience, and understanding.
Schedule a meeting or a construction class to gain an understanding of how the entire construction loan process works, from pre-application through the construction’s completion. Come prepared to discuss the scope of the construction project.
Leaving the meeting or class, you should be able to do four key things:
1. Know your borrowing strength
This number is the result of an estimated financial analysis based on factors such as your income (debt-to-income), assets, cash reserves, source and verification of funds required at funding, credit history, credit score, and loan program.
2. Determine your loan amount
Most lenders calculate the maximum loan for a remodel loan based on a full appraisal. The appraisal will be based on the value of the completed project, as determined by comparables within a close range of the surrounding area of the property. The percentage of loan-to-value will be determined by each lenders’ program.
3. Decide on your builder
A good professional will be able to provide an accurate cost breakdown and timeline. They also come with an understanding of building codes and requirements, knowledge that most amateur home builders would need to put hours of research to obtain. A professional’s ability to read blueprints accurately is extremely important. Another bonus of hiring someone: a general contractor will often provide warranties on the products and work they complete, either personally or through subcontractors.
4. Identify a timeline
The three major factors that play into establishing the amount of time it will take to complete your project typically include obtaining permits, funding of the loan, and the availability of the builder. Prior to meeting with your architect, call the permitting office to verify what information you’ll need to provide and the limitations with your build and property. Be sure to get an estimate for timing on permits once your application has been submitted, so you can build those dates into your plan. A bit of advice: work with the revisions as required by the city or county—there will be revisions.
Putting in the time to plan your remodel early may seem like a lot of work, but it will pay off in the long run when it helps the overall remodel process go smoothly. Houses are built on foundations—and at the end of the day, you’ll be glad you laid this foundation of preparation and planning.
If you’re interested in remodeling your home, check out some of our related blog posts about using a professional designer for your remodel, preparing for a remodel, and the benefits of having an architect and contractor work together on your remodel.