Interested in building your dream home? You'll almost certainly need a construction loan. Ryan Warren, Chief Retail & Sales Officer/SVP, and Haley Barnes, Marketing Coordinator, discuss what to know about getting a construction loan. From where to start to how construction loan financing works, the process does not have to be as overwhelming as it may seem. Watch below.
Read the Full Interview
Haley Barnes: Hey everyone. My name is Haley Barnes and I am the Marketing Coordinator here at CBC Bank. Today. We just want to talk with you guys a little bit about construction loans. I have brought Ryan Warren here today, he is our Chief Sales and Retail Officer here at the bank and is also a lender. I will let him tell a little bit about himself and his experience and then we will dive in and talk about construction loans today.
Ryan Warren: Thank you, Haley. Like she said, my name is Ryan Warren. I'm a Senior Vice President here at Commercial Banking Company. I've been here for five years, I have 22 years of banking experience and I've done construction lending most of that time. So it’s something I'm passionate about, I love doing and am anxious to help.
Haley Barnes: Perfect. Sounds good. Well, I guess we'll go ahead and get started, I guess just to start off, when someone is deciding that they want to build a home. What is the first step in that process whenever they're getting started?
I want to build my own home. Where do I start?
Ryan Warren: Sure. Great question. A lot of times when people want to build a home, the real bottleneck seems to be at the beginning because they don't understand where to get started. They're a little bit overwhelmed by the thought of such a daunting task. So what we're here to do is to talk to someone and to walk them through the entire process and to make sure that they understand from the beginning, what they need to do.
Essentially, when you want to get started, the first thing you really need to do. Come sit down, talk to myself, talk to Rex Dorsey here at CBC Mortgage and we get together and we decide how much you can afford based on the bank's criteria, the secondary markets criteria, and by your own wants and needs. Everyone's financial situation is different. So we like to take that person, sit down with them, guide them through maybe what best suits them as far as, how much they can afford, and then try to merge that with what they want and try to find a happy medium there that suits all the needs.
So that's the very first thing we like to do when someone wants to build a home. After that, you start putting together your wish list, the house, what you want it to look like, what you want to have in it. And you find your general, excuse me you find either an architect or a draftsman to take and build you a plan. Some people will buy a plan. After that you take, and you have that modified to suit exactly what you want. You then take and you look for a general contractor, someone who can build that house for you. It's at that point that you're going to get a price from that builder. Once you get a price, you already have sat down and talked to us at that point, you know what that price is, it's rarely ever the same.
So you try to bring it and you make cuts. You make concessions, maybe you think about your financial situation and what I can do differently to help me get to a point to where I'm comfortable with going forward. And that's, that's our job, to help you become comfortable because the worst thing that can happen is for you to take and build your dream home, but not be able to afford it, or vice versa, not be able to afford your dream home and build something that maybe you don't want and aren't happy with. So we're here to make sure that we can accomplish all of that or help you get to that point to where you can.
Haley Barnes: What all does a construction loan cover when it comes to, obviously the home, but land, or are there any other factors to consider that a construction loan will cover?
What does a construction loan cover?
Ryan Warren: Sure. Great question. Number one, in the state of Georgia, a lot of people are confused that the house and the land are two separate things. In the state of Georgia or that matter most any state, all that I'm aware of, property is defined as the real estate plus any improvements to the property. So if you're building what we call a stick built home, which is not a mobile home essentially, then that is going to be just an improvement of the land. So it all has to be done together.
Now someone may already own land and they may want to build on it and we can add that into their construction loan. Maybe their land's already paid for so they don't have to do that. But either way, the two have to be one – the land and the improvements to the land are all part of the home and the construction, and ultimately the permanent mortgage.
The construction loan itself is the mechanism that's going to get you a house built, so that you can then get your permanent mortgage on the secondary market. Unfortunately, they're two different items. They're two different products, as opposed to a couple who's going to go out and just buy a home. If you're actually going to build a home, that's where the construction portion comes in, to where you have to get that home built before you can get your mortgage.
Haley Barnes: Okay. Yeah. So you don't necessarily have to already own land whenever you're building a home, you can put the land and the home into one loan together.
Ryan Warren: That is correct.
Can you talk more about how the construction loan and mortgage loan process work together?
Ryan Warren: I'll back up a little bit and talk about why that's important to have all of that [construction loans and mortgage loans] under one roof. Here at CBC, we're able to take and get you a construction loan, and we're also able to take and get your permanent mortgage again in one spot.
The reason that's important, not just for the advice, not just for the cohesion of being able to work together all with one bank that makes you, or excuse me, that helps you get to that point, but there's also some cost savings involved in that. We actually normally collect a 1% origination fee on a mortgage. Well, if you did your construction loan through CBC, we only charge a quarter of a percent, well, three quarters of a percent. That can turn into real money that could save someone, $1500, $2,000, to a $225,000 mortgage. So that's one benefit to using us.
There's also, we can use the same appraisal under most circumstances for the construction and the perm loan. There's another $450. So those things add up to where, we can save someone two or $3,000 by just doing it all in one place, as opposed to just using a construction lender and then going out to XYZ mortgage company and getting a mortgage loan. So there's some benefit of bundling all that into one, both from the service side and from the cost side.
Haley Barnes: Yeah, for sure. That's awesome. And that's definitely not something that you can get anywhere as well. So that's a huge benefit to being able to have both the construction, and the permanent loan side there in one area for sure. So, tell me, how hard is it to get a construction loan? What does that process look like when it comes to, credit score, risk tolerance, all of that.
What kind of credit score do I need to qualify for a construction loan?
Ryan Warren: Sure. It's hard to point to one particular factor or another and say, "This is exactly where you have to be," because anytime you take in there five, six, seven components, it's not just your debt ratio, not just your credit score, not just your loan to value, but all the things that go into getting a loan. We look at that as a whole and each situation is different.
So, in general terms we require a 650 credit score or better. We require a 43% debt ratio or better, which is the government's guidelines that changed in 2015. So, and we require an 85% loan to value or better when it comes to loan to value. So that's the bank's policy on those three major items of credit, I guess, or underwriting. But at the same time, there may be times where it's still might not be a good idea for a particular customer to do something just because they check the boxes. And that's why we're there to give guidance and to give some advice in that respect.
Haley Barnes: All right. Well, I think that's all the questions that I had. If you have any other comments or anything great. If not, no big deal. But-
What else should I consider when getting a construction loan?
Ryan Warren: Yeah, the last thing I would say is, if you're watching this blog, you're thinking about building a house, make sure that you do your homework and you get the right information. There's a lot of products out there that you can find. There's a lot of products that might offer you cheaper closing costs, but turn around and give you a higher interest rate, make sure you're making an educated decision and that you've got all the information when you do that. Because the one thing I see a lot of, especially on the secondary market side is a lot of bait and switch on promising things like, "Oh, we're going to give you a no closing cost option." Well, the reality of that situation is that anyone who's in business has to make some money. That's part of being in business and most educated customers understand that.
But what they're doing to you is they're just taking and upping an interest rate to turn around and make that money on the back side. And in some cases that may be good for you, but just make sure you're making an educated decision. Make sure you get a fee worksheet, make sure you look at your interest rate, make sure you look at your monthly payment and you weigh all that out. And you make an informed decision because especially in the age of the internet, there's people out there, they'll make you all sorts of promises and they'll make you all sorts of sales pitches. Just make sure you're making an educated decision when you do that.
Because that's one thing that I talk about often with our lenders and with CBC Mortgage, we're really proud of the product we offer and the job we do. And we feel like that we're pretty up on the competition here in town, and for that matter nationwide. And we've got as good a product as there is out there. So I encourage people to, yeah, sure, shop it, take a look around, just make sure you're getting all the information, make sure you're making an informed decision and we all want what's best for the customer ultimately.
Why should I work with CBC Bank?
Haley Barnes: Perfect. Sounds good. And then also last thing I did want to mention is that we do serve a wide area of South Georgia. Ryan works here at our main branch, on North Valdosta Road in Valdosta, but we also have another branch location in Valdosta on Baytree, we've got [an office in] Hahira, we've got a location in Moultrie, and Tifton, and we have in-house lenders at every single one of those locations that could help you throughout this same exact process as well.
Ryan Warren: We've got a great group of lenders, a very seasoned group of lenders. Haley mentioned our branch in Tifton and our branch in Moultrie as well. We have three branches here in Lowndes County, which is Baytree, Hahira, and our main office. All of those branches contain a staff of educated people who are very good at what they do. They have the same resources that we have here at the main office with CBC Mortgage. We build houses all over South Georgia, essentially, if you're in a county that is in Lowndes, Tift, or Colquitt county or any county that adjoins one of those counties, we make construction loans in every one of those counties.
So, that's something that we have a very good knowledge of the market. We have a very good knowledge of the people that we deal with for the most part in those markets. And we're able to provide a lot of helpful information to the customer who may only do this once in their lifetime. That's the hard part. It's very important to have a subject matter expert when you're doing something that you may only do once in your entire life. It's so helpful, that's reassuring, and we find that that our customers put a lot of value in that.