Custom Construction Loan

Last week we closed on a custom construction loan with Washington Federal.

When it comes to construction financing, there are two major options (unless you can self-finance): get a bank loan or get a private bridge loan.

Private bridge loans allow you to move faster, can be easier to get, and provide more freedom. For example, a bank may not approve a loan for a home using non-standard construction methods. However, they are more expensive; interest was 15-20% on the loans we considered. Refinancing a private loan once construction is complete can be more difficult because the bank considers the project more risky than one it has already vetted.

Bank loans require a long process of approving the borrowers, builder, and project, but they are cheaper. Depending on the bank, a construction loan may have a standard mortgage rate plus a fee equal to some percentage of the loan or the loan may have a rate 2-3% higher during the construction period. Banks tend to be more rigorous about inspections, which can be both a benefit and a hindrance.

We chose Washington Federal on Yuval's recommendation. As a builder, he finds them easy to work with, and they have a good reputation (e.g., Erika's grandparents thinks they are the best choice). Another advantage is that their construction loan automatically converts to a standard mortgage; no refinancing needed.

The standard credit application for us was approved easily, and Yuval was already verified as a builder with them. The project approval required a fully-approved permit set, along with a budget breakdown, and some other details. This part of the process took longer than normal, first because we had to wait for the permits, and second because the bank had problems finding an available appraiser who was willing to evaluate a modern, green, construction project in Bellevue.

Once everything was approved, the bank worked on finalizing the paperwork and getting it sent to escrow. I worked on getting a course of construction insurance policy in place, along with some other minor details. Once the escrow agent had the documents, we wired the funds for the fees and down-payment, signed all the documents, and the bank managed to close the loan the same day. And now construction can start! Excavation is scheduled to start October 1st.