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How to Get Started on Home Construction Financing

home construction site at dusk

Jon Mykala has been in mortgage banking for 26 years. As the senior mortgage banker at Dart Bank in Chelsea, Michigan, he’s one of our most valued and trusted partners. Jon comes alongside our homebuilding clients to assist them in their journey towards realizing the home of their dreams.

Many of our homebuilding customers have questions and anxieties about financing their construction project, so we asked Jon to share some of his expertise and guidance with us. Here are his construction financing tips.

Home Construction Financing With a Trusted Guide

Jon, tell me about how you work with clients.

I think some of the advantages that I have when I work with a builder like Giraffe is, in addition to having a background in finance, I’ve been involved in a lot of my own projects. So when a customer steps into my office for a construction loan, I think that gives me the ability to look at both prospective parties’ positions and help navigate people. On multiple occasions, it’s been a huge advantage to both sides—for builders like Giraffe, and my clients too.

What makes Dart Bank a good choice for financing?

I’ve been doing this for 26 years, and during that time I’ve been with a few different banks. Over the course of my tenure, the benefits that Dart brings to the table is it’s a very hands-on bank. We’re a small community bank, and it’s all about the personal touch.

I know that sounds cliche in today’s world, but we’re not just blowing smoke. We really do walk people through the process, based on their individual situation. People will call up and ask for a brochure about our construction programs, and I can’t do it because every construction loan we build is customized and hand-tailored to each one of our clients.

So we are truly a boutique lender that focuses on our individual clients.

On top of that, though, we have a group of people here with a very long history in mortgage banking. We have relationships directly with Freddie Mac and Fannie Mae. This allows us to operate in the same arena with big banks, in terms of technologies, low cost, competitive rates. So when people come to me, not only do they get great service, but we’re beating the interest rates of a lot of the big banks out there.

Tell me about your partnership with Giraffe.

I’ve known Martin (owner of Giraffe) for a long time, so there’s a personal connection there. We’ve had multiple projects together. We just work really well together. We have a construction department that works directly with Giraffe, so it feels like one-stop shopping for the clients, and it makes it a seamless project. You don’t have the gaps in communication, and that makes it so much smoother and less stressful.

So people know they’re being taken care of in their numbers, too. Because accountability makes a big difference, as well.

The thing about Giraffe is they’re easy to work with, and there’s a high level of integrity. So as a lender who’s trying to take care of a financial piece for a customer—there are people out there on the building side, unfortunately, who you have to worry about. How they’re paying their subcontractors, and where their money is going. And with Giraffe, I know the integrity exists that they’ll account for all of the work they’re doing—and doing exceptionally well. There’s a level of integrity that isn’t as easy to find in today’s world as maybe in years past.

When someone wants to start a home build project, when should they come in to see you, and what does the process look like?

With building a home, it’s a lot different from someone who’s refinancing or buying a house. With building projects, there are so many different facets that it’s important to start a pre-approval as early as possible in the process. Because if you don’t have an idea of your numbers, then it’s more challenging to sit down and define your parameters. But if you have an idea of what you’re going to spend, you can coordinate that with me so I can then shape that.

But the process itself is simple. I have them start with an online application before I even sit down with a client. Then, when we do sit down, I can talk specifically about their individual situation. I don’t have to talk in generalities or hypotheticals. We can sit down and we can start to talk about the process. Things like how the loan process will be intertwined with the construction process.

When we get closer and we start talking about collecting documents, there are some specific steps in that process. But the sooner we can start having a discussion, that’s the most important piece.

What home financing options are available for building a new home?

The most common, and the majority of the loans we create for construction, is called one-note closing. Basically, we’ll finance up to 95 percent of the overall cost of the project, as long as it appraises for that value. So, for example, let’s say someone comes to us and the cost of their land and the build job is $500,000. We would then lend 95 percent of that value. That construction loan also becomes their mortgage.

That’s where the term “one-note closing” comes from, because you’re closing your construction and mortgage together at one time. You have one set of closing costs and you lock in your interest rate right up front. You have all these protections.

The other nice thing we do—and I don’t know if any other banks are doing it right now—is something called a free float-down. At the end of construction, if interest rates are lower than when we closed, we’ll give the customers a lower interest rate, without additional fees or refinancing.

Lot financing is helpful too, but maybe not as common. Bridge loans have been pretty useful. A bridge loan allows you to extract equity out of your current home and use that for the down payment of the new home—whether that’s for land or the down payment of the construction portion.

We also have home equity lines that we can attach to the existing home, if we don’t use a bridge.

What are the most common misconceptions around home financing?

The most common ones are that there’s a large down payment required, and that they have to start making repayments immediately as soon as you close. Both of those are incorrect. We can do as little as five percent down, and you’re only paying interest as the loan progresses.

Appraisals. There’s a misconception that if you’re building, your house is going to appraise low. That happened a few years ago, as we came out of the economic crisis of 2008. New construction appraisals were notoriously low up until about 2016, then the market started finding a balancing point. So new construction appraisals are starting to land on firm footing more often.

Also, people are afraid that pulling credit will nix their credit score. While pulling credit does put a small hit on your score, an inquiry really doesn’t do a lot, especially if you’re spreading it out and only having one or two people pulling your credit score. It’s more advantageous to pull earlier rather than later.

Self-employed borrowers often worry that they can’t get financing. But if you’re making money and you’re reporting it, you can get a loan like anybody else.

Thanks for your time, John!

A Financing Partner You Can Trust

Dart Bank is one of our most trusted financing partners. If you’re planning a home construction project, your financing needs are in good hands with Jon Mykala. Talk to us today about how to get started.