So, you’ve decided to get a construction loan to fund your project. However, you don’t know much about these loans. Well, the most important thing is to consult your contractor before you get a construction loan. Your contractor should tell you about your building project’s timeline. Also, they should explain factors that can slow down your project, like inclement weather.
After discussing such details with your contractor, decide whether to go via the loan process twice or once. Also, consider the closing costs and fees you will pay to obtain the loan. All these will increase the total cost of your construction project.
Getting your construction loan entails more than accounting for your house building costs. In some cases, you may need money to buy the lot or the land to build. Therefore, decide how you will handle the total construction cost later. One way you can do this is by getting a permanent mortgage after building your house. If that’s your preference, a construction-to-permanent loan might be an ideal option for you. That’s because it enables you to avoid several closings.
Getting a Construction Loan
Having the lender approve your construction loan might seem like obtaining a traditional mortgage. However, you have to meet several requirements.
Here are the qualification requirements for a construction loan:
- A stable income
- Excellent or good credit
- Low debt-to-income ratio
- At least a 20% down payment
Before you make an application, meet with your architect, get plans and drawn specifications, and negotiate a contract. That way, you will know the total cost of your construction project and the amount to borrow.
The lender will review your payment history, income stability, savings, and the ability to pay back the loan. What’s more, they will check your specifications and plans. They will also obtain a property appraisal to support your collateral value.