The lender we used for pre-approval and purchase of the land was a woman we used for our current homes refinance. She had been great in the past but after several email threads, we started realizing we were not clear on the type of loan we were getting or how much it was going to cost us. We got screwed. The loan terms were unclear regarding the amount of penalty price for early payoff. Even though we were clear we were going to try and build in the near future, our lot loan from Sun Trust had an early payoff penalty that was more significant than we understood it to be by several thousand dollars. Moral of the story, even if you think you understand the terms, ask again. If your lender can't explain it clearly, fire them and get a new one.
The penalty only applied if we didn't go with Sun Trust for the construction loan. Of course, Sun Trust was not remotely competitive once they have you trapped in a lot loan like this. So, we paid the penalty and will be staying far away from that company and lenders using them. Seems like a pretty seedy practice, particularly the way the loan was presented. Certainly neither Sun Trust or the loan officer could hold any responsibility. It must be the fault of the University educated, experienced home buyers. Not that I am bitter but I hope you can avoid this type of trap by going with a reputable lender. If you remotely don't trust your loan officer, get up out of the chair and go somewhere else. Loans are pretty simple really. You get a lot loan or a construction loan. More on loan types below.
With the land or lot loan, you just buy the land. It is like a regular mortgage in that you pay the loan off, with interest, until it is paid off in 15 or 30 years. If you want to build something on the lot, you have to get a construction loan which pays off the land loan. If you know your building soon and can control the process really well, you would skip this loan and go straight for the construction loan.
With a construction loan, it is more like a credit card. You get a line of credit to draw from with a maximum limit. Only with this line of credit, you have to get approvals on your purchases (stages of building) and an investigator comes out to inspect your property with each account draw. When you take your first draw, say to pay off the land loan or buy the land before building on it, you get a grace period before you start paying principal. Instead, you pay the interest on the part of the loan you have drawn from the account. The construction loan also has a time limit ticking against it and if your not done building by the time the limit is up, you start paying the full mortgage.
After the lot loan debacle, we ditched the lender who put us in a bad loan and secured a construction loan through a new lender recommended to us by a friend. Brad did a great job of working to get us out of the mess although it cost us dearly. Mostly, I appreciated his patients while we waited and waited and waited for King County to get us permits but more on that later...
What I mean by this heading is that during the course of a construction loan, several things take place. There is an initial payout to the builder to kick off construction, then a series of inspections by the lender to ensure progress and quality of work by the builder. Each inspection is typically followed by another check on which you will typically be paying interest only. Although your loan terms will vary. The problems we encountered with the construction loan were all around communication between the lender, inspector and builder. The lender drives the rules such as inspection periods, what level of work must be complete, timing on when a check can be requested, etc. However, rules vary by lender so your builder (and possibly inspector) have to figure out the details. Bad juju ensues when they get it wrong or otherwise struggle with the lenders terms. For this reason, I recommend getting a builder you trust and then using a lender that the builder is familiar with. Saves everyone frustration during construction.
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