Whether you are a novice builder or investor just starting out, or someone with years of construction experience under your belt, a construction loan is a vital aspect to the success of your project. While building a home from scratch comes with many possibilities, it also comes with a particular set of challenges, and a traditional mortgage simply will not cut it. Instead, a construction loan is required. But beware, as these tend to be more difficult to qualify for than run-of-the-mill mortgages. Follow these tips to be better prepared to qualify for a construction loan.
To start, a lender will look diligently at a few key factors, including the market, financials, and credit history. When building a home from the ground up and applying for a construction loan, two things are of paramount importance to lenders - that you can build the house and proof that the finished property will be valuable enough for the lender. Regarding the former, the lender will likely ask to underwrite your building (and selling) experience and will likely ask other questions to ascertain your skill level. Since you are asking for money for something that does not exist yet, you've got to work with your lender and deliver needed diligence.
This brings us to the next most important aspect - having detailed plans in place before applying for a loan. In order to appeal to a lender, prepare to be armed with every detail of your building project. This includes things like a precise proposed budget, floor plans, profit expectations, and materials lists outlining design aspects of the project. This compilation of crucial evidence is often one of the most critical things in the eyes of a lender.
With regards to a down payment on the loan, expect to put down more on your first few loans with a lender – before you have sufficient repayment history. The lender must be confident in your commitment to the project. One helpful tip is that you can use your lot as equity, whether or not you will own it. It is worth noting that some lenders will only make construction loans available to investors, and not borrowers looking to build a primary residence.
While much of this may seem daunting, it should not deter you from applying for a construction loan! Rather, it goes to show that being prepared financially and logistically will make all the difference in being able to qualify for a construction loan. This way you can focus on getting the job done and getting a strong return on your investment.