While there's a fair bit of information out there regarding traditional home loans and mortgage options, it's not as easy to find information about new construction loans. Construction loans are a different beast from their traditional mortgage counterparts.
With a traditional home loan, the existing home is the bank's collateral; you skip out on the loan, and the bank has something they can sell to recoup their investment.
Financing an empty piece of land for more than the land is worth is a much trickier proposition. However, if you have an adequate income and a decent credit history, you should be able to finance your metal building without a problem.
Financing options for metal buildings
Financing your metal building is no different from financing a traditional wood-framed structure. In fact, because of their durability and longevity, your choice of a prefabricated metal building may make you an even more appealing loan candidate.
Note: If you own a farm or ranch, you may be able to use special grants and/or loan offers from the U.S. Department of Agriculture. Check the USDA website for more information and make sure to work with a lender who specializes in agricultural loans, so you get the best deal.
The first step to financing your metal building is to make sure you are applying for the right loan. There are different loans for different building scenarios. Two of the most common include:
1. Financing the land and the construction of a metal building
This type of loan used to be divided into two phases, which could leave buyers with higher payments if a construction project lagged and interest rates went up by the time occupancy, and a permanent loan was granted. These days, most lenders skip this idea and offer construction-to-permanent loans instead.
You agree to a specific interest rate or select an adjustable rate mortgage and your loan will proceed similarly to a traditional home loan. The bank will cut checks concurrently with the building phases, so the bank's representatives regularly check to ensure construction is on track.
2. Financing only the construction of a metal building
If you already own the lot and are ready to build, you can apply for a traditional construction loan, without the need for extra financing to cover the land costs. Typically, your land will be the asset the bank holds against your loan, although other collateral may be required depending on your situation.
Keep in mind that these loans often require more documentation to move successfully through the ranks of underwriters.
Types of loans for steel buildings
Whether you are financing land and construction or construction only, you have to decide what type of loan best suits your needs and abilities.
- One-time close construction. These are often called “all-in-ones” because there is one signing. Both construction and permanent loans have the same interest rate. Once the construction term is complete, typically 12 months, the loan converts to a permanent mortgage loan.
- Note modification construction. Two separate rates will apply. The first is a fixed rate for construction and a different rate for the permanent loan. The rate for the permanent loan can be locked in, or you can float it for three to nine months.
- Two-time close construction. This is like financing two different loans, one for the construction phase and one for the permanent mortgage loan. After the first loan closing, construction begins. You need to close a second time to refinance the construction loan into a permanent mortgage.
Where to get financing for your steel building
- Banks and credit unions - A bank is the first place most of us think of when looking for a mortgage loan. Of course, credit unions offer home loans as well, but there are key differences between the two institutions.
- Mortgage banks - These are banks that specialize in originating and servicing mortgage loans. Once the loan closes it is sold to a secondary mortgage market such as Fannie Mae.
- Mortgage broker - Mortgage brokers (mortgage lenders) are independent contractors who offer loan products from a variety of wholesale lenders. They can also provide general advice about the loan process, products, and credit issues.
- Online lenders - Online lenders are generally part of a traditional bank or other financial institution that makes use of electronic payment. It is likely that, even if you finance with a traditional lender, you will be provided with a payment portal for online transactions.
- Private Lenders - Private lenders are individuals or non-bank businesses that loan money secured by note and deed of trust. Private lenders vary from family and friends to accredited investors and more.
5 additional considerations about obtaining a loan
- Be prepared. Your lender will want to see a realistic building timeline, official plans and many even want a cover letter or some type of written document that tells the "story" of your projected building. Keep your timeline realistic, making allowances for weather and other unforeseen occurrences, so you don't wind up in the stressful experience of a lender who threatens to back out when things aren't going according to the original plan.
- Find a licensed contractor. Lenders insist that every contractor and subcontractor who works on your building is licensed, bonded and insured. Make sure the contractor you hire has worked with lenders in the past as this will facilitate your loan process and make for a more fluid relationship between the contractor(s) and the lender's inspectors, who will make trips to the job site from time to time before the next fund's dispersal. Always verify a contractor's license with your local building department, and do take the time to check referrals. Word of mouth is often the best way to find a well-respected and reputable contractor in your area.
- Save 20% for a down payment. As mentioned above, construction loans can be trickier to get because there is less collateral for a bank to fall back on if you default on the loan. Thus, many banks require that you have 20% to put down on the total land and/or construction costs. Most lenders will refuse to pay more than 80%.
- Be patient. You will spend more time providing documentation and proof of income/expenses/debt than with a traditional loan. It's to be expected due to the higher risk construction loans pose to lenders.
- Get a reduction in insurance costs. In many cases, building a metal building saves you a little extra money when it comes to building insurance. Low-maintenance attributes, resistance to storm conditions, and fire-proofing provide significant discounts.