How to Get a Loan to Build a House: Have you thought about building your own house instead of purchasing an existing home for your next home? A brand-new house can offer many benefits, including higher energy efficiency and lower repair costs. You also have the option to customize many aspects of your home. First, you need to determine how to obtain a loan to build.
Start the process of getting a new construction loan.
The first steps to obtaining a loan for construction are the same as buying a house.
- Talk to a lender about getting pre-approved for the amount you can afford.
- Create your list of wishes, including features and locations.
- Look for new communities and builders within your price range. A seasoned real estate agent is a great resource.
The decision to purchase a custom or production home will determine your next financing steps.
Buying within a Development
A builder who builds multiple houses in a development will offer to finance similar to purchasing an existing home. Most builders can arrange to finance, but make sure it’s competitive.
You can apply for your loan when you sign the contract with a builder. However, you will be able to lock in terms once the property is complete.
Buy a custom-built home.
You have more options for financing if you are having your house built on your lot. However, there are additional steps. You will need to get a construction loan unless you’re paying cash. You may need to shop around as these loans are less readily available than regular home loans.
A few lenders offer a one-step loan that is interest-only while the house is being constructed and then converts into a mortgage after construction. Has the advantage of only having to pay the closing costs once. However, some lenders prefer to go through a two-step process. The initial portion of the interest-only loan is at a prime rate. The latter part reflects regular mortgage interest rates.
Strong credit requirements
Construction loans are riskier. A down payment of 20% to 25% and a credit will be required. The cost of the land and the planned construction will determine the down payment requirements. You can use the equity you have on the land to finance your construction loan.
Your lender will also check your credit and credentials. The drawdowns of the funds are typically at predetermined completion points. Inspectors must approve the progress.
How to get a construction loan
You will need a loan before obtaining the financing you need to begin your construction project. Because the loan will not be secured or collateralized by a home, this approval process is usually more stringent than mortgages and other loans. Lenders will have to approve traditional borrower standards and review and approve architectural plans, an estimated construction timeframe, and a budget.
You will need the following documents to be approved for loan construction.
- Excellent to good credit. To reduce risk, lenders require that borrowers have a minimum credit score of 680 to be eligible for a loan. Some lenders will require that you have a minimum score of 720. Before applying for a loan to build a house, you should work to improve your credit score.
- You should have sufficient income to repay the loan. Your lender will request financial statements and other documentation to confirm your income.
- Low debt-to-income ratio. The borrower’s ratio shows how much you owe and your gross monthly income. Your DTI ratio will determine how much cash you have each month to pay construction loan payments. Lenders typically require that the DTI ratio is no more than 45% to issue construction loans. Increases the chance that borrowers can afford their payments.
- At least 20% down payment. Borrowers must pay at least 20% down when taking out a construction loan. Many lenders will require a down payment of 25% and 30% of total construction costs. While the requirements vary from lender to lender, a down payment of less than 20% may be required to pay private Mortgage Insurance (PMI).
- Construction budget approval and project. Due to the uncertainty involved in building a home, lenders need as much information as possible. You can increase your chances of approval by providing documentation such as a deed for the land, blueprints, specifications, a bank-preferred format line-item budget, a payment schedule, and a signed construction agreement with change order provisions.
- A general contractor or builder approval. You will also need to prove to the lender that your architect/builder is licensed, insured, and qualified. You may need to provide copies of the builder’s insurance certificates, resumes, and proof of financial stability. Include a description of the responsibilities of each party, including the general contractor, architect, and others involved in the project.
How to choose a construction loan lender
It’s easy for people to get overwhelmed when it comes to choosing a lender to lend construction loans. It can be tempting to settle for the first lender that you find. This decision should not be light. These questions will help you find the right lender for your needs.
- What type of construction loans are you able to offer?
- What interest rates are there? What are interest rates available?
- Are there any closing costs?
- Can I use my equity in my land to make a down payment?
- What percentage or set schedule do you use to pay construction draws?
- Can the builder request a drawing before they can pay for materials?
- What happens if the construction of your home or costs rise suddenly?
Additional funding sources for new construction
Your lender may be able to offer you a bridge loan while you wait for your existing home to sell. Although this can be risky and expensive if you plan on selling your home, it can help you get out of a tight time frame.
Will require you to move twice, allowing you to free up equity toward your new property.
Financing a home requires additional steps. Consider all the pros and cons before deciding if a new home is worth the hassle. Have fun building! Call to apply at (571) 544-6600.
