The construction loan process is often one of the most challenging aspects of building a home on your land. It can be a frustrating process, but understanding why it takes so long can help ease some of the frustration. Here are two main reasons it takes so long to get approved for a construction loan.
Government red tape
The housing crisis in 2008 resulted in lots of new federal regulations. Those regulations are designed to help protect the people borrowing money and hold the banks accountable to the decisions they make.
Banks want to make sure they're covering everything, which can lead to them being overly cautious. And when they're extra cautious, they're also slow. Especially when the rules are constantly changing.
There are checks, double checks, and triple checks to make sure everything is right and in line with regulations at every step of the process.
One example is the fees the bank quotes you. They have to match the final numbers exactly. You as the customer have three days to review the final numbers. If there's a mistake, they take the time to correct the mistake plus give you another three days to review the final numbers.
Hidden processes at the bank
There's a hidden, but not secret, process at every bank when it comes to loaning you money. The loan officer that you meet with is more accurately the loan salesperson. They don't really have the authority to make decisions—they're simply guiding you through the process.
You give all of your information to the loan officer, and they turn it all over to the underwriter, or the "man behind the curtain." The underwriter scrutinizes all of your info and compares your financial situation to a checklist of bank and federal requirements. If they see something that's not typical or if a little more information will help you qualify for the loan, they'll call the loan officer to request that info.
Then the loan officer calls you to request the additional information the underwriter needs. You may be thinking, "Why didn't you just ask for that information up front?" The reason is the loan officer doesn't know what information will be needed. The underwriter doesn't know every piece of detail needed either until they start reviewing your information. It's a process, and it takes time.
While complying with all the federal regulations and waiting on the bank's hidden process can make it seem like the loan process takes forever, it's a necessary process. The checks and balances in place help ensure you get a loan you can afford that meets all the requirements of the bank and government regulations.
Yes, it's frustrating and seems disorganized, but it's actually a well-define process. Be patient and know they're working on it.
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