Critical Thinking. It's the characteristic which defines us as human beings. It's the same characteristic which is vital to the ultimate creative challenge: the design/build process for residential construction.

Building a custom home means creating a home style which matches your life style. You want a home to reflect your character, your values, your environment. A home as original as you are.

Critical thinking about a construction loan begins before you even visit a lending institution. To get the best possible deal you have to know how to choose the right lender.

What are your rights? One resource to discover how the lending system works is the Federal Reserve Board. Under the heading ``Consumer Information'' their home mortgage article begins with this admonishment:

``Shop for the mortgage package that best meets your financial needs. If you apply for a mortgage and the lender says you don't qualify, keep in mind that some lenders have stricter credit standards than others. Try someone else. Don't stop shopping after one discouraging experience - or even several.''

Where can you get good advice? As part of the decision making process, speak with an attorney, certified public accountant, or realtor not associated with a lending institution. Be careful before you act on any expert's advice! A good professional can help you save time, money, and headaches, but you have too much at stake to trust an expert to do your homework for you.

One good source for up-to-date information is HSH Associates. HSH Associates is the world's leading publisher of mortgage and consumer loan information. They don't make loans -- they report on the terms offered by lenders across the country. However, you'll also benefit from their ``Library '' and ``Author's Corner'' as well as links to other sources of information.

What will home building cost? Start by guesstimating these costs:

+ Buildable Site

+ Home Design

+ Construction Cost

+ Cost of Financing

_________________________________________

= TOTAL COST TO BUILD YOUR CUSTOM HOME

These costs taken in combination will determine the amount you may need to borrow. For example, in regards to a buildable site, you not only must consider the asking price for the lot, but you must also consider the total expenditures to develop the site in order to build. Each site is unique requiring different expenditures so this specific dollar amount will vary from site location to site location.

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Keep in mind that this aggregate guesstimate is only a ``working'' figure. There are many variables to consider which can affect the total cost, but you've got to at least create a beginning point from which to proceed. Match the dollar amount for which you are pre-qualified with your best estimate of the total cost to build your home on the site you choose.

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Are you pre-qualified? Before you even begin to search for a buildable site or a home design, find out how much you're qualified to borrow from a lender. Consider this an important inaugural lesson about the entire home design/build process. Completing a residential loan application at your local lending institution will force you to assemble all the necessary documents.

Finding out how much you can borrow in order to build will vary according to issues such as your credit record, down payment issues, the type of loan you choose, and existing market conditions. As an initial step, this prequalification effort will help you better understand what you can afford.

However, remember that getting prequalified is NOT the same as completing a loan application. Not only is prequalification FREE, but getting prequalified is very informal and the lender should be able to let you know approximately how much you'll be able to borrow very quickly.

In this way you'll know immediately if you can even afford to proceed with the project you have in mind! If you qualify to borrow the amount of money in your guesstimate to do your remodel or new home construction project, then you can confidently move forward with the more formal, time-consuming effort of making a loan application with your lender.

What forms will be provided by the lender? Typically, a lender will provide you with a variety of forms (although this may differ from lender to lender):

• an ``application checklist'' form,
• a ``residential loan application'' form,
• a ``description of materials'' form,
• and a ``construction cost breakdown'' form.

Pay VERY CLOSE attention to the application checklist and residential loan application. Keep the description of materials and construction cost breakdown for later reference.

At first the residential loan application and your personal financial statement will need to be completed but don't actually submit these forms because your still in the information gathering mode. Since you're just shopping for the best deal possible and not yet making a final choice, don't get bogged down with further details such as a complete set of working drawings, a description of materials, a construction cost breakdown, or details of lot acquisition.

What information will be required from you? As you shop around to different lenders, you'll find their requirements may vary slightly, but the following information is usually required from you:

• Employer's address and phone number, length of time you've worked there, and your current position and monthly income; OR
• (if self-employed) profit and loss statements, tax returns and balance sheets for the past two years, as well as the current period.
• Your personal asset and liability backup information, including account numbers, balances, and addresses and phone numbers of your financial institutions.
• Details of lot acquisition such as deed or a copy of the earnest money agreement. Also, you must provide notification of any covenants which apply such as approval by an architectural review committee.
• Full documentation for your home building project:
  • A complete set of working drawings;
  • A description of materials;
  • A construction cost breakdown.

If this seems like a lot of information to track down, don't worry. A loan officer will be glad to help you every step of the way. Why? The lender wants your money; they need you as much as you need them.

Remember: You'll be shopping for the construction loan which best meets your financial needs. Your first application won't be your last application; so, once you've accumulated this required information, the process will be less arduous each time you shop a lender.

What next? Critical Thinking. It's both an art and a science. Take advantage of your intellectual capacity to weigh and consider loan options.

• Know your consumer rights.
• Get good professional advice.
• Understand total cost to build.
• Pre-qualify for the amount you can borrow.
• Create valid and reliable documentation.

The ``description of materials'' and ``construction cost breakdown'' forms will come in handy later when you eventually consider a suitable home design. These forms aren't necessary to pre-qualify for a loan.

Use these forms early in the conceptual phase of the home design process so you can assess your cost structure and plan your specifications at the outset of design development. These forms will be added to you loan application once you've made a final choice of which lender is best for you.

An advantage to using these forms early in the home design process is to remain within the application format required by the bank.

You'll find it very efficient to be in conformance with the application documents right from the beginning of the design/build process so you won't experience any inconvenience translating FROM how the architect/designer organizes the description of materials and construction cost breakdown TO how the lender requires you to present the very same information to them on their forms.

Another advantage to using these forms is to know from Day One of the design process that the cost to create your home style is what you can afford to build.

Whether you work with a general contractor or act as an owner/builder, you'll want assurances from the architect/designer that the materials specified and scope of work described in the conceptual drawings is consistent with your pre-qualified budget amount. Why aggrandize a design solution which you cannot afford?

Using the lender's required loan application documents will cause you to do a line item cost analysis for each phase of the design/build process and account for all the money to be spent so you can be assured all expenditures will be covered by the loan amount. Be sure the residential designer/architect does a cost analysis from the get go.

Most important: Don't tolerate "attitude". You're doing someone a favor when you allow them to make money by doing business with you. If you experience a loan officer with an "attitude" which denotes arrogance or a know-it-all demeanor, it's time to politely excuse yourself from the situation. This is your money. You're the BOSS. Critical Thinking is the key!