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Northwest Bank

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NORTHWEST BANK HELPS BRING NEW CONSTRUCTION
TO THE IOWA GREAT LAKES

The anticipation of a new build is an exciting process for a lot of different parties. From the homeowner to the contractor, it’s the start of a new adventure.

However, for most people, the whole process doesn’t take place without the assistance of a bank and a construction loan.

Northwest Bank provides construction financing to qualified applicants throughout the region. This particular loan serves as temporary financing, providing a line of credit throughout the building process. A borrower would access the funds as needed to pay for bills that arise.

For instance, when a borrower decides to build a house, they will need to put together detailed building plans and estimates. This would require the assistance of their contractor or builder, who would help with exact estimates and provide direction for everything from siding to flooring.

“Once a potential borrower has specific plans and estimates in place, they would come to us for the construction loan,” said Angie Peterson, Northwest Bank Vice President, Residential Real Estate.

After those documents have been submitted, the bank has an appraisal done covering the proposed build.

“We look to see if the house is worth what the borrower would like to put into it,” Peterson said.

A construction loan is usually a 12-month line of credit where the borrower makes interest-only payments on the principal balance. Once the home is finished, the loan is modified into permanent financing, which is typically a 15-year, 20-year, or 30-year fixed rate loan.

“A construction loan is more of a two-step process, compared to buying an already built home where you know the exact purchase price,” she said.

A borrower must also be able to put down 10-20% of the total cost in order to qualify. This can be accomplished in three ways, whether it’s via a cash down payment, cross collateral, or from sweat equity. The cross collateral down payment comes from another property and the equity from that property. If someone is handy or has family members able to assist in the building process, the sweat equity may be a valid down payment.

“For instance, this is for someone who has family or they themselves can help with the construction work,” Peterson said. “Maybe you’re planning on doing all of the painting or going to finish the basement yourselves. This can all help in the long run.”

Peterson mainly works with residential construction homes, whether it’s a person’s primary residence or a second home. There is also a commercial loan department within Northwest Bank that assists businesses looking to remodel or build. Another common scenario is a loan for a builder putting up a spec home, where they receive a line of credit to build the home and would sell the house once it’s finished.

“You only pay interest on what you’ve borrowed, even if you don’t use the full amount,” Peterson said.

For those who have built and gone through the process, they know the difficulty of staying within the budget. Depending on the situation, going over the budget or the borrowed amount can create some difficulties.

“If there are any changes in the cost, we need to update our information,” she said. “We will need a revised appraisal and have to make sure we still have equity in the property.” If the borrower has only put down 10%, Peterson said they must work very closely with the builder to make sure there aren’t any surprises or cost overruns.

“The construction loan framework is different compared to loans available for purchasing a home already built,” she said. “There are 100% financing programs available, so if you don’t have the down payment, then maybe a construction loan isn’t the route you want to go. It may be better to look at existing homes.”

Throughout the process, Northwest Bank works closely with the borrower who in turn works with the contractor. Whenever an invoice is due, the borrower has to authorize all bills and submit them to the bank.  Then the bank reviews and issues payment directly to the contractor.

The anticipation of a new build is an exciting process for a lot of different parties. From the homeowner to the contractor, it’s the start of a new adventure.

However, for most people, the whole process doesn’t take place without the assistance of a bank and a construction loan.

Northwest Bank provides construction financing to qualified applicants throughout the region. This particular loan serves as temporary financing, providing a line of credit throughout the building process. A borrower would access the funds as needed to pay for bills that arise.

For instance, when a borrower decides to build a house, they will need to put together detailed building plans and estimates. This would require the assistance of their contractor or builder, who would help with exact estimates and provide direction for everything from siding to flooring.

“Once a potential borrower has specific plans and estimates in place, they would come to us for the construction loan,” said Angie Peterson, Northwest Bank Vice President, Residential Real Estate.

After those documents have been submitted, the bank has an appraisal done covering the proposed build.

“We look to see if the house is worth what the borrower would like to put into it,” Peterson said.

A construction loan is usually a 12-month line of credit where the borrower makes interest-only payments on the principal balance. Once the home is finished, the loan is modified into permanent financing, which is typically a 15-year, 20-year, or 30-year fixed rate loan.

“A construction loan is more of a two-step process, compared to buying an already built home where you know the exact purchase price,” she said.

A borrower must also be able to put down 10-20% of the total cost in order to qualify. This can be accomplished in three ways, whether it’s via a cash down payment, cross collateral, or from sweat equity. The cross collateral down payment comes from another property and the equity from that property. If someone is handy or has family members able to assist in the building process, the sweat equity may be a valid down payment.

“For instance, this is for someone who has family or they themselves can help with the construction work,” Peterson said. “Maybe you’re planning on doing all of the painting or going to finish the basement yourselves. This can all help in the long run.”

Peterson mainly works with residential construction homes, whether it’s a person’s primary residence or a second home. There is also a commercial loan department within Northwest Bank that assists businesses looking to remodel or build. Another common scenario is a loan for a builder putting up a spec home, where they receive a line of credit to build the home and would sell the house once it’s finished.

“You only pay interest on what you’ve borrowed, even if you don’t use the full amount,” Peterson said.

For those who have built and gone through the process, they know the difficulty of staying within the budget. Depending on the situation, going over the budget or the borrowed amount can create some difficulties.

“If there are any changes in the cost, we need to update our information,” she said. “We will need a revised appraisal and have to make sure we still have equity in the property.” If the borrower has only put down 10%, Peterson said they must work very closely with the builder to make sure there aren’t any surprises or cost overruns.

“The construction loan framework is different compared to loans available for purchasing a home already built,” she said. “There are 100% financing programs available, so if you don’t have the down payment, then maybe a construction loan isn’t the route you want to go. It may be better to look at existing homes.”

Throughout the process, Northwest Bank works closely with the borrower who in turn works with the contractor. Whenever an invoice is due, the borrower has to authorize all bills and submit them to the bank.  Then the bank reviews and issues payment directly to the contractor.

The draw request usually takes place within 24 hours, as Northwest Bank wants to make sure the contractors are getting paid quickly.

Also, if the borrower purchases items on their own such as fixtures or appliances, the person would be reimbursed from the line of credit.

At the end (during) of the building process, the subcontractor or contractor signs a mechanics lien waiver, which says they’ve been paid in full and aren’t able to come back and ask for more money. This means there aren’t any more liens on the property, protecting the bank and the homeowner.

Peterson finds it rewarding to provide financing for the creation of someone’s dream home and then watch it come alive from start to finish.

“It’s exciting to watch a plan on paper turn into a dream home,” she said. Peterson follows the build’s progress and enjoys being a part of inspections. She’s especially enjoyed inspecting new lake homes she’s assisted with financing.

“I enjoy helping anyone with construction financing and watching their home come alive,” she said.

For anyone looking for construction financing, Peterson would love to help them through the building process. Jo Currell, Mortgage Loan Originator, also assists with constructions loans. They both can be reached by calling Northwest Bank at (712) 336-1034.