Shop for Rates
All lenders are not created equal. Rates can vary from one institution to another. Each lending institution sets rates based on whether they are actively pursuing loans. Some lenders price their loans aggressively to attract business, while other lenders are less interested in attracting loans. Therefore, it is beneficial to check with several lenders to secure the best rate.
Another alternative is to utilize the services of a loan broker. A loan broker has contacts with a number of lenders. The broker will shop for the best rates and present you with options. In some cases, the lender pays the broker. Therefore, if you do not wish to pay for the broker service, it is important to understand how the broker will be paid before you consent to the arrangement. These arrangements provide for payment at the loan closing. Since the broker is paid only when the loan is secured, he has a strong incentive to find the most attractive rate.
Pre-Qualify
When you have identified a potential lender, it is a good idea to pre-qualify for the loan. This will require you to make a formal application. The lender will probably require a personal financial statement. Be prepared to explain your need for the loan in detail. Provide a clear explanation of the project. A written narrative is a good idea. You will need to justify the amount of the loan request. Make sure you have included everything in your request such as an amount for unforeseen contingencies. However, the request should not be more than the actual need. Finally, provide a reasonable plan for the repayment of the loan. Your credit score will determine your loan rate. If necessary, take the time beforehand to take steps in boosting your credit score to its maximum potential.
After Approval
After your loan has been approved, you may be asked if you would like to lock-in your rate or float with the market. Locking in the rate will require a fee. However, if you choose not to lock in, the market rates might go up before you close and you will be required to pay the higher rate instead. Pay attention to what's happening in the financial world in order to get a sense of whether to lock-in your rate or not. Also, take into consideration whether your loan option will require two closings: one closing for the initial construction loan; and another for the permanent loan. If you have the option, avoid double closings; it will save you money.