When getting ready to visit a lender regarding your loan, consider the terms and conditions of the construction loans available before you choose. Lay out a spreadsheet of the loan differences discussed below and others you are concerned about. Before you see lenders, call and ask their policy on the key terms. After you present your case to a lender, talk through their terms using your checklist. If you are considered a good candidate, the lender will negotiate any or all of the terms.

Origination Fee -

This fee can vary from zero percent of the loan amount to as much as three percent.

Loan Rate -

The interest rate could be fixed or adjustable, and pegged at some percentage over prime. Adjustable rates are less risky for the lender and more risky for you.

Down Payment Required -

Is the land you have secured enough of a down payment? Do you have to have the land fully paid for? Is additional cash required, and how much?

All-in-one Loan -

Some enlightened construction lenders are offering combination loans that you close on only once. When you finish construction, the long-term mortgage automatically kicks in and pays off the construction loan. These loans save on origination and some other fees.

Interest Rate Locks -

If you catch the market at a good time, interest rates may be temporarily low. Rate differences can mean thousands or tens of thousands of dollars on your interest costs on the long term mortgage. You may be able to lock in a low future rate by paying a small fee. What rate can you get and what will it cost?

Title Insurance and Other Fees -

What will be the other charges on your closing statement? What will be the cost of title insurance (a big ticket item)? What other fees will you see?

Draw Procedures -

Construction lenders can make your life miserable with restrictive draw procedures. What does it take to get money to pay the bills? Does the lender require any home office or out of town approvals before disbursing funds? Are there completion percentage inspections required? How often can you get a draw? How much advance notice do they require? Is there a fee? Is the money paid directly to subs and suppliers, or to you? Who handles check writing and lien releases?

Uninstalled Item Draws -

Kitchen cabinets are often ordered weeks or months before installation, and a 50% deposit may be required. Can the bank deal with this, or will they be difficult with you about the fact that you make the deposit before the cabinets are installed? To get bargains on some other items such as ceramic tile, you may have to pay cash for supplies before they are installed.

Cost for Inspections -

Lenders want to have the project inspected periodically to see that the work they pay for has been done. Some lenders insist on an inspection before every draw, and make you pay for the inspections. Most lenders have a program of periodic inspections. Some lenders charge nothing for inspections; many, however, do.

Title Update Fees -

Some banks take a legal precaution of updating your title periodically. This limits the conditions under which subs and suppliers can file a lien and verifies that no creditor has any claim on your property. Do you pay for the procedure?

Category Shifting -

If you save money on one area of the project, for example excavating, can you apply the extra to another area, such as kitchen cabinets? How user-friendly is the procedure?

Insurance Cost -

The lenders have arrangements with various insurers that could save you money on course of construction insurance.

Time Limit -

With most construction loans, you get a loan on which you make no payments. A construction loan accrues interest as time goes by, and that interest is usually paid off by the long-term mortgage on completion. How much time will they give you before the loan is over and you must make interest payments? Six months is common, but very optimistic since the average owner-built house takes longer to build. Many banks give nine months on a custom home.

Cost of Extension -

If you go over, is there a fee for extra time before you have to make monthly payments? What will the interest rate be?

Additional Amounts -

If you need more money to finish your project than anticipated, and you qualify for it, can you get it? Do you have new origination or other fees to pay? Is there a change in interest rate?

Disputes -

What recourse do you have if there is a disagreement? Our loan was tied up for a month late in the project because the bank insisted that we had spent 92% of the funds but that the project was only 87% complete. We had subs that wouldn't do more work until paid, but the bank wouldn't advance a nickel. It turned out that their computer spreadsheet had a totaling error and they were off by six percent. We had no way of getting their attention in the meantime.