Ask what you can comfortably afford before you ask how much you can borrow.
Most homeowners walk into a bank and ask one question: how much can I borrow?
It’s the wrong first question. The right conversation starts with your project and your budget, and it goes a lot better when you bring the right information with you.
Don’t overlook this. Central PA has community banks and credit unions that lend against local real estate every day. They often know the local market, keep loans in-house, and have construction and home equity products that look different from what a national mortgage company offers.
If you have good income, substantial equity, land, investments or an established banking relationship, sit down with an actual lender and explain what you’re trying to do. Not “can I borrow $150,000?” Explain the project:
“We owe this much.
The house is worth approximately this much.
We’re considering a $150,000 addition.
Here is the construction estimate.
What options do you have?”
That’s a much better conversation. For new construction, bring information about the land too.
Rates, fees and loan programs vary more than people expect. One lender may be strong on HELOCs and weak on construction loans. Another may do renovation mortgages every week. A local bank, a credit union and a mortgage lender will often give you three very different answers to the same question.
Comparing two or three is normal, and it’s the easiest money you’ll save on the whole project.
The more real the project number is, the more useful the lender’s answer will be. A guess gets you a guess back.
For most mortgages and home equity loans, lenders have to give you a standard three-page Loan Estimate within three business days of your application, so you can compare offers line by line. The CFPB explains how to read one. HELOCs use different disclosures, so ask for the rate, fees and repayment terms in writing.
Compare the APR and total closing costs, not just the headline rate.
This is something people don’t realize until fairly late. Certain construction and renovation loans require substantially more documentation than a homeowner-funded project. The lender may want:
Some contractors don’t work that way, and some won’t take financed jobs at all. Renovation mortgages, FHA 203(k) loans and construction loans each have their own requirements.
This is one reason we put so much emphasis on what goes into a good construction estimate. For larger financed projects, paperwork isn’t separate from construction. It’s part of getting the project funded.
I’d ask a different question. What can I comfortably afford?
A bank approving you for a certain amount doesn’t mean you need to spend it. A $175,000 addition might be technically financeable. That doesn’t tell you whether the resulting monthly payment makes sense for your family.
Before you start designing around the maximum number a lender gives you, figure out what payment and total debt you’re actually comfortable carrying. Then let that number help define the project.
Don’t spend two months designing a $250,000 addition if you realistically have $100,000 available. And don’t automatically abandon a project you think costs too much before understanding what financing options actually exist.
Know the two numbers early: what the project costs, and what you’re comfortable spending.
Should I talk to a lender before getting a construction estimate?
Talk to both early. A rough price range helps the lender give you a useful answer, and knowing your financing helps set a realistic project budget.
How many lenders should I talk to?
Two or three is reasonable. Rates, fees and loan programs vary, and local banks and credit unions often offer products national lenders don’t.
What is a Loan Estimate?
A standard form lenders must give within three business days of applying for most mortgages and home equity loans. It lays out the rate, payment and closing costs so you can compare offers.
This page is general information, not financial advice. Smego Construction is not a lender, mortgage broker or financial advisor, and nothing here is a recommendation about your particular circumstances. Loan products, eligibility and terms change and vary by lender — confirm anything here with a qualified lender before making a decision.
Fifteen minutes on the phone. You’ll have a realistic range before we hang up — and if we’re not the right people for it, I’ll tell you.