A Construction loan is generally a short-term loan often set for a term used for the cost of building a home or a commercial property. When buyers utilize a construction loan they are financing the cost to build a house versus financing a home that has already been built. While construction loans are ideal for builders to work with, they don’t always suit every buyer. For example, in order to qualify for a construction loan, you have to have good credit and prove you are not a huge risk in what is already a smaller niche market of home financing. When you work with a good construction loan lender like Diditan Financial, experts will make sure you get into a good loan that accommodates your means. Our professionals have been helping borrowers for over a decade secure construction loans with the lowest rates, while always looking out for their needs and wellbeing. Here are some common questions we get from borrowers pursuing a construction loan:
How can I Qualify for a Construction Loan?
In order to qualify for a construction loan you must fulfill a number of requirements to satisfy the lender. Here is what you will need:
A Qualified Builder – A bank expects construction loan borrowers to work with a licensed general contractor or builder with a well-established reputation for building high-quality homes. If you intend to function as your own general contractor you will face certain difficulty in finding a lender because part of their risk lies in the ability for a home to get built on time, at budget, and correctly.
Detailed Specs – You will need to show the lender detailed specifications of your build that includes floor plans, material details, and a copy of the builder’s Blue Book–a comprehensive document showing all the details going into the home ranging from insulation type to ceiling heights and even what type of stone will line the circumference of the swimming pool.
Establish a Home Value – Your lender will work with an appraiser to determine what the home’s value will be upon completion. The appraiser will study the Blue Book, consider the land value, and contemplate the specs on the home. Then these figures are compared to kindred homes in the same or similar location to determine an appraised value based on the comps.
Down Payment – When you take out a traditional loan you may or may not be required to make a down payment, but when it comes to a construction loan you will always have to make one. Generally, 20% is the minimum you can put on the table, though some lenders may require a higher percentage. The more you can put down, the greater the faith you can instill in the lender that you are committed to completing the project and fulfilling your end of the loan.
Credit Score – Just making a handsome salary isn’t enough to secure a construction loan. Various lenders have specific credit requirements. Typically, a credit score of 680 or higher is ideal for a loan of $417,000. If your construction loan is for more than that, you will likely need a minimum credit score of 700.
If I am in Debt can I Still Get a Construction Loan?
Since a higher credit score is required for approval on a construction loan, having prior outstanding debt could throw a wrench into the gears of your approval process. However, not all types of debt are frowned on by construction loan lenders. For example, if you defaulted on payments to the Wine of the Month Club, your lender may not care. If you missed a payment on your Nordstrom’s card, again, your lender may not regard this as a risk. However, if you have missed a mortgage payment, or you ignored your HOA fees, you could easily get denied.
What Does my Debt-to-Income Ratio Need to be for a Construction Loan?
Your debt-to-income ratio is the percentage of your earnings used to repay your loan, and most lenders do not want it exceeding 45 percent. You can calculate this by dividing your total debt payments by your monthly income.
What are the Benefits to Building a Home Versus Buying One?
There are many benefits to building a home that you can’t always get in one already existing. Here are some worth thinking about if you are considering a construction loan:
Have it Your Way – Most people favor building a home because they get exactly what they want. When you buy an existing home rarely can you find one that meets all the “must-haves” on your check-list. Usually, buyers will have to sacrifice something. For example, you may find a home that has the big back yard, open floor plan, and huge master suite, but that walk-in closet and third bathroom is missing. When you build your home you can piece in everything you want, down to the finest details of closet space, built-in storage, and everything in between.
Better Investment – It wasn’t until the early to mid 2000s that open concept living became popular. Before then it was ideal to have the kitchen separated from the rest of the living space. According to Realtor.com, two of the biggest selling points to a home is the kitchen and an open-space living concept. The challenge in finding a home with an open space is that most houses on the market were built when it was common to have segregated galley kitchens, and closed off family rooms. When people shop for homes they will often only look at houses for sale that allow their budgets to make these changes, and even then a buyer could walk away if the wall that needs to be removed is load-bearing (meaning it supports the top of the house) and too expensive to fix (it would need a support beam and an engineer to oversee the project, which is expensive). Big open kitchens and open-concept living is here to stay, so when you build a home to meet these specifications, you are building a great investment that will garner big bucks in its re-sale value.
Safety – Building a new home offers safety that lots of older homes don’t have. Houses build before 1977 may have materials like flooring and insulation full of asbestos that is dangerous to be around. Also, many lead-based paints and other toxins exist in older homes that pose health risks. When you build a home contractors use safe, state-of-the-art products. For example, spray foam insulation is not only safe for humans and the environment, it also helps keep your heating and cooling bills down, and it offers better sound proofing. For additional safety you can even have fire walls built into your home, as well as a panic room to protect the family from intruders while the police are on their way.
Efficiency – New homes offer better efficiency than older ones. For example, you can’t deny that craftsman homes from the turn of the century are beautiful, quirky, and one-of-a-kind. However, most homes from that era used clay or cast iron plumbing. These pipes have a life expectancy of about 75 years, so if you do the math you will see that the original plumbing in older homes will give you major problems sooner than later, and getting a brand new plumbing system can cost up to $25,000. Also, older homes with original wiring can use up more electricity than what is required and pose fire risks. New build homes use the latest eco-friendly materials, and offer additional energy-saving benefits like solar power, energy efficient sealing in windows and doors, energy efficient heating and cooling systems, and watering systems for the garden with settings that allow for greater preservation.