- How long will it take to get all of the supporting items
- When the plans and budget are done for the appraisal
- How long will we sit in the underwriting queue for approval
- How long will the appraisal take
- Will we have any appraisal delays or issues
- The dreaded “unexpected”
- Dispute the appraisal – You can dispute your appraisal if you believe it is factually inaccurate or does not represent market value. To do this you will need to complete a dispute form. Once you complete that we will send in for the appraiser to review. The dispute results could take 2-4 business days. As you might imagine, getting the appraiser to change his or her own opinion is a tough task. The success rate for appraisal disputes is low and if successful the improvement is generally small. The most successful disputes are the result of providing comparables that should have been used but were not. Providing 2-4 alternative comps is helpful in improving the value upon dispute. If a Realtor can provide these it can also help. Comps need to be similarly sized and improved homes sold within six to 12 months and located within a mile of the property.
- Request a second appraisal – If you are not satisfied with the results of the dispute, we may be able to order a second appraisal. We have to dispute the first appraisal before we can order a second one. To do this we need to make a request to our review department. If they approve the second order request, there may be a fee to do so. The process and timing of the second appraisal will be about the same as the first appraisal.
- Eliminate the contingency – If you have a contingency in your budget, there’s no need to have it if it means you will just need to bring in the additional cash to close. Keep in mind though that if there are any increases to the budget during the construction phase, you will need to cover those. Any change to the budget needs to be reviewed by the appraiser.
- Reducing the budget – To be clear, this is reducing the costs of the same items in the budget and not changing the scope of the project. It’s not uncommon for the budget to have “some fat” in it initially. If it’s possible to trim the budget on the same items, it will reduce your cash to close. Any change to the budget needs to be reviewed by the appraiser.
- Condition the budget lower – This is not ideal, but can be a strategy to move forward on the project. Essentially what you are doing is reducing the budget on items you know will be realized at a higher amount during the construction phase. This strategy can make sense for clients who anticipate they will have excess cash or income to fund any overages as they occur. This may be from the sale of a home or employment compensation that comes in lump sums like bonuses or business distributions. One key item to remember if utilizing this strategy is that if/when items come in higher than budgeted during the construction phase, you need to cover the difference. This is done at the time the item is paid for and not at the end of the project. Any change to the budget needs to be reviewed by the appraiser.
- Change the scope of the project – Changing the scope of the project is probably the last resort. Generally speaking, when people change the scope of the project they reduce cost by eliminating costly aspects of the project. Sometimes those aspects provide a lot of value in the opinion of the appraiser. When changing the scope of the project, you should use the existing appraisal as a guide to what the potential changes may be. The size of the home is the most important aspect of value. So if you reduce the size of the home, be prepared for a lower value once the appraiser reviews the changes. Other changes can be a crap shoot as well. When changing the scope of the project, there is no telling if the appraiser will make changes to the opinion of value.
-
- Confirm loan amount – Based on the final appraised value, we may need to change the loan amount. My team and I will discuss all final options based on the appraisal.
- Confirm loan program – Discuss the program we are approved at and make any changes if desired or required. My team and I will discuss all final options.
- Lock – if the loan is not yet locked, we need to do so well before closing.
- Review cash-to-close needed – Sometimes the appraisal requires us to verify more assets than we initially verified. We need to discuss where the cash to close will come from and document additional accounts or other sources of funds. Be sure to discuss where you will obtain additional funds if they are not in your current bank accounts. Outside funds need to be sourced.
- Review final conditions – By the time the appraisal comes back, we have hopefully received all of the approval conditions from you that we communicated. So at the point the appraisal is final, we just need to gather any construction-related items like final cash-to-close and signed builder contract.
- Final sworn statement from builder – The final sworn statement from the builder will show any costs already paid by you and any request for a deposit at the time of closing. We allow a deposit of up to 10% for the builder at closing.
- Pay your bills, especially your mortgage, on time
- Use your credit cards as normal and keep balances low (credit gets re-pulled prior to closing)
- Stay employed
- Start projects on the home prior to approval
- Apply for any new credit – loans or credit cards
- Make a major purchase
- Consolidate credit cards
- Move money between banks accounts
- Take in large deposits
- Document Request Responsiveness – Believe me, we know. We ask for a lot of stuff. And some of the stuff doesn’t make sense. We are not happy about it either. We just need it. We promise not to ask for anything we don’t need. We promise. But for the stuff we do ask for please try to get us what we need as quickly as you can. Partial bank statements or documentation means we will probably ask you for the same item again. And that’s really not fun for us.
- Bank Statement Things – We are required to make sure the funds a borrower is using are their own funds. That means if there are any large deposits or transfers, we need to source those items. Any “large” deposit of 50% or more of your gross income will need to be sourced. That means we would need a copy of the check to see where it came from and make sure it’s not a loan. So be prepared to source those large deposits and certainly try to limit any non-payroll deposits you have.
- Loan volume – Loan processing, underwriting, and appraisal turn times can be slower during peak loan volume. This may be the regular spring buying season or maybe volumes are high due to high refinance volume.
- Plans and Budget – Completion of the plans and budget will take longer than you think. At the same time, you also want to make sure you don’t rush that process so your project comes out how you vision it. But delays in the completion of the final plans and budget can often delay the start of your project. This is especially important if you are purchasing the property at the same closing as the construction loan.
- Appraisal Issues – We addressed those above. A low appraisal can slow down or derail the loan process. That is why it is vitally important to make sure we have complete construction items and that the appraiser understands the project to receive the best possible outcome.
Everyone’s construction loan roadmap will be a little different and take different timeframes. The single biggest item that impacts how long it takes to close on your construction loan is when adequate plans and a budget are available. Because the construction loan appraisal is based on the plans and specs of the project, the appraiser cannot begin until those are available. You want to give yourself 30 days from when the plans and budget are available to order the appraisal before you close your loan.
In this roadmap we will address three areas; the typical timeline of events, common delay factors, and the team members you will be working with during the loan process.
Your Timeline Roadmap
The toughest question to answer is “How long will it take?”. It’s tough because it depends on a number of different, impactful issues:
- How long will it take to get all of the supporting items
- When the plans and budget are done for the appraisal
- How long will we sit in the underwriting queue for approval
- How long will the appraisal take
- Will we have any appraisal delays or issues
- The dreaded “unexpected”
Issues above aside, if everything goes as planned and we are able to order the appraisal right away or early in the process, the typical start to close timeframe can be 30-60 days. If we are able to get all we need from the client right away and order the appraisal, we’ll be closer to the 30-day time frame. If it takes a while to get items from the client and the appraisal can’t be ordered for a while, it will be closer to 60 days or longer. We’ve had a few clients that have taken a year to close due to delays in plans and changes in builders and budgets, and we’ve closed loans in 20 days when we’ve received everything we needed immediately.
Your Team Roadmap
While I would love to be able to take every phone call and answer every question clients have during the process, it’s simply not possible. For every hour that we spend directly with a client, we spend 5-10 hours in the background working on the file. Because of that, I ask my team to assist clients through the process as well as the other third-party individuals like builders, attorneys, Realtors, title companies, etc.
I am fortunate to have a great team that supports me and my clients. While the construction loan process can and is complex at times, we all have a tremendous amount of experience to work with you through this process and address head-on any issues that we need to work through.
Every Tuesday morning we have a team meeting to discuss all clients and loans in process. This allows everyone to get up to speed on what’s needed to get your loan closed successfully and as easily as possible. Throughout the rest of the week, we will reach out to you to communicate that status.
Mike Burke, Sales Assistant
Mike assists me in coordinating the loan approval. He will assist with the initial loan disclosures and getting the loan sent to the processors for underwriting. Mike and I will work together in notifying you of loan approval and what’s needed to get your loan closed. If you have any questions on the status of the loan approval or items needed to close, Mike is your primary contact.
Jennifer Cook Haeuser, Senior Production Manager
Jen helps me manage all aspects of your loan process. She concentrates on assisting you and the operations group after your loan is approved to get you to closing. You most likely would hear from Jen at the end of the loan process to get the last items taken care of before we close.
Lynne Zaehler, Construction Coordinator
Lynne concentrates on the construction items. During the loan process, she will manage the initial budget, coordinate the appraisal, and finalize the details of the construction items. During construction she can assist if there are questions on a draw, although our construction draws are reviewed and approved through our servicing group in Wisconsin. If there are any questions about the construction items or draws, Lynne will be your primary contact.
Rebecca Minx, Team Administrative Assistant
Rebecca is often the voice you will hear when calling me directly and assists the team in many different areas. From the application to managing your mortgage payments after you close, Rebecca can assist to find someone who can.
Our goal as a team is to update you often. We may be reaching out to discuss the appraisal that just came in, loan approval, reminding you we need something, or just letting you know we are waiting on approval or the appraisal. Regardless of how quickly (or slowly) things appear to be progressing, my team and I are doing our best to make sure we are able to close in the timeframe you want to close. The most common things that delay the process are appraisal delays and delays in your obtaining adequate plans and budget so an appraisal can be ordered. We’ll discuss in greater detail the most common delay factors and what can be done to help avoid them.
Application
The application is done electronically. For construction loans, we often start them based on a lot of estimates — estimates for budget, estimates for the appraised value and maybe even a program we haven’t made a final decision on. The initial documents are only intended to get started. You are not committed to these terms. Prior to closing and after the appraisal is back, we will solidify everything.
Items Requested from You
There will be some items you upload with the online application. We will review what you have provided and request any additional items that underwriting will require before making a loan decision. We promise not to ask for anything we won’t need. In some cases, you will send us something that triggers a new request.
Items Received from You
Once we received the supporting financials underwriting will require, we can move your loan to the processor for underwriting submission. Keep in mind, there’s a chance something on the items that you provided may require us to ask for additional items. The most common are K-1 and/or corporate returns that appear on your personal Schedule E of your tax return or sourcing large deposits. Your loan should be processed in 2-4 days for underwriting once we have what we need to submit.
Plans and Budget
We need firm plans and budget to be able to order the appraisal. Plans need to be floor plans with dimensions and elevations of the exterior of the home. If there will be no change to the exterior of the home, we will not need elevations. If there will be no change to the floor plan of the home, we may not need floor plans. Either way, we would like to have a complete list of specifications or scope of work.
The budget needs to contain the entire scope of the project including any items that won’t be part of the contract you have with your builder (ie “owner items”). It’s very important to discuss with me and my team if there will be owner items. These need to be addressed in a specific manner.
Approval
It’s very likely we will get the loan approval back before we get the appraisal. The loan approval will be conditional. That means the underwriter has reviewed the loan request and approved it based on credit and income submitted but needs additional information before we can be clear to close. Generally speaking, the conditions aren’t deal breakers but just additional items that are required. One of the conditions we may have is verifying we have enough cash to close. This condition may change once the appraisal comes back.
Appraisal
Whether it’s a construction loan or a “regular” loan, the appraisal is a significant piece. The collateral on the loan is the property so the bank wants to make sure they are confident what the value of the collateral is before a loan is made.
Once we have adequate plans and budget, the appraisal will be ordered. Depending on the project (ie new build or rehab) the builder or the client will be the primary contact. New construction appraisals take a longer period of time than “regular” loan. The appraisal process from ordered to received generally takes 2-3 weeks for various reasons. Providing the appraiser clear plans and budget will improve the timing.
The construction appraisals are also a little different from the value that can be expected. For example, if someone were to purchase a $500,000 home, the appraiser will probably come back with a value of $500,000. However, if a client were to build a $500,000 home or buy a home for $200,000 with $300,000 in improvements, it’s less likely to “hit the number” of $500,000. For various reasons such as available comps, cost of land or construction, and other reasons, the appraised value does not commonly come in at the total project cost (land plus construction).
What if my appraisal comes in low?
If the value comes in lower than expected, there are a few remedies to either increase the appraised value or reduce the cash to close needed.
Increase Appraised Value
- Dispute the appraisal – You can dispute your appraisal if you believe it is factually inaccurate or does not represent market value. To do this you will need to complete a dispute form. Once you complete that we will send in for the appraiser to review. The dispute results could take 2-4 business days. As you might imagine, getting the appraiser to change his or her own opinion is a tough task. The success rate for appraisal disputes is low and if successful the improvement is generally small. The most successful disputes are the result of providing comparables that should have been used but were not. Providing 2-4 alternative comps is helpful in improving the value upon dispute. If a Realtor can provide these it can also help. Comps need to be similarly sized and improved homes sold within six to 12 months and located within a mile of the property.
- Request a second appraisal – If you are not satisfied with the results of the dispute, we may be able to order a second appraisal. We have to dispute the first appraisal before we can order a second one. To do this we need to make a request to our review department. If they approve the second order request, there may be a fee to do so. The process and timing of the second appraisal will be about the same as the first appraisal.
Reduce Cash to Close
If you are not able to increase the appraised value from the initial number, there are a few strategies to reduce the cash-to-close number.
- Eliminate the contingency – If you have a contingency in your budget, there’s no need to have it if it means you will just need to bring in the additional cash to close. Keep in mind though that if there are any increases to the budget during the construction phase, you will need to cover those. Any change to the budget needs to be reviewed by the appraiser.
- Reducing the budget – To be clear, this is reducing the costs of the same items in the budget and not changing the scope of the project. It’s not uncommon for the budget to have “some fat” in it initially. If it’s possible to trim the budget on the same items, it will reduce your cash to close. Any change to the budget needs to be reviewed by the appraiser.
- Condition the budget lower – This is not ideal, but can be a strategy to move forward on the project. Essentially what you are doing is reducing the budget on items you know will be realized at a higher amount during the construction phase. This strategy can make sense for clients who anticipate they will have excess cash or income to fund any overages as they occur. This may be from the sale of a home or employment compensation that comes in lump sums like bonuses or business distributions. One key item to remember if utilizing this strategy is that if/when items come in higher than budgeted during the construction phase, you need to cover the difference. This is done at the time the item is paid for and not at the end of the project. Any change to the budget needs to be reviewed by the appraiser.
- Change the scope of the project – Changing the scope of the project is probably the last resort. Generally speaking, when people change the scope of the project they reduce cost by eliminating costly aspects of the project. Sometimes those aspects provide a lot of value in the opinion of the appraiser. When changing the scope of the project, you should use the existing appraisal as a guide to what the potential changes may be. The size of the home is the most important aspect of value. So if you reduce the size of the home, be prepared for a lower value once the appraiser reviews the changes. Other changes can be a crap shoot as well. When changing the scope of the project, there is no telling if the appraiser will make changes to the opinion of value.
Once Appraisal Is Final
Once the appraisal is final, we will firm up everything and move toward scheduling closing:
- Confirm loan amount – Based on the final appraised value, we may need to change the loan amount. My team and I will discuss all final options based on the appraisal.
- Confirm loan program – Discuss the program we are approved at and make any changes if desired or required. My team and I will discuss all final options.
- Lock – if the loan is not yet locked, we need to do so well before closing.
- Review cash-to-close needed – Sometimes the appraisal requires us to verify more assets than we initially verified. We need to discuss where the cash to close will come from and document additional accounts or other sources of funds. Be sure to discuss where you will obtain additional funds if they are not in your current bank accounts. Outside funds need to be sourced.
- Review final conditions – By the time the appraisal comes back, we have hopefully received all of the approval conditions from you that we communicated. So at the point the appraisal is final, we just need to gather any construction-related items like final cash-to-close and signed builder contract.
- Final sworn statement from builder – The final sworn statement from the builder will show any costs already paid by you and any request for a deposit at the time of closing. We allow a deposit of up to 10% for the builder at closing.
Clear To Close
Once the underwriter has signed off on any and all final conditions including the appraisal, we will be clear to close. At that point, we can schedule and/or confirm the closing.
A few reminders of things to do and not to do during the loan process:
Do
- Pay your bills, especially your mortgage, on time
- Use your credit cards as normal and keep balances low (credit gets re-pulled prior to closing)
- Stay employed
Don’t
- Start projects on the home prior to approval
- Apply for any new credit – loans or credit cards
- Make a major purchase
- Consolidate credit cards
- Move money between banks accounts
- Take in large deposits
What are the typical items that add time to the construction loan process?
- Document Request Responsiveness – Believe me, we know. We ask for a lot of stuff. And some of the stuff doesn’t make sense. We are not happy about it either. We just need it. We promise not to ask for anything we don’t need. We promise. But for the stuff we do ask for please try to get us what we need as quickly as you can. Partial bank statements or documentation means we will probably ask you for the same item again. And that’s really not fun for us.
- Bank Statement Things – We are required to make sure the funds a borrower is using are their own funds. That means if there are any large deposits or transfers, we need to source those items. Any “large” deposit of 50% or more of your gross income will need to be sourced. That means we would need a copy of the check to see where it came from and make sure it’s not a loan. So be prepared to source those large deposits and certainly try to limit any non-payroll deposits you have.
- Loan volume – Loan processing, underwriting, and appraisal turn times can be slower during peak loan volume. This may be the regular spring buying season or maybe volumes are high due to high refinance volume.
- Plans and Budget – Completion of the plans and budget will take longer than you think. At the same time, you also want to make sure you don’t rush that process so your project comes out how you vision it. But delays in the completion of the final plans and budget can often delay the start of your project. This is especially important if you are purchasing the property at the same closing as the construction loan.
- Appraisal Issues – We addressed those above. A low appraisal can slow down or derail the loan process. That is why it is vitally important to make sure we have complete construction items and that the appraiser understands the project to receive the best possible outcome.
I hope this roadmap will help you understand the process, the timeline, and prepare you for any possible roadblocks. Ultimately, my team and I will guide you through the process step by step and work very hard to make sure any issues are overcome so you can move forward with a successful construction project.
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