By Jane Meggitt
The process of taking out a loan for construction requires even more due diligence than a conventional mortgage. If you’re well-prepared ahead of time, the odds of having your construction loan approved rises considerably.
1. Get Your Finances In Order
Before applying for a loan, get your finances in the best possible order to ensure you qualify. That means getting a free credit report from the major credit reporting agencies Equifax, Experian and TransUnion, and making sure the report doesn’t contain errors. If you spot a mistake, contact the agency and supply documentation.
If your credit score is under par, work to improve it before taking a loan out. Pay down high-interest credit card debt, make sure your bills are paid promptly and don’t apply for any credit cards or other loans you don’t need. You must supply the lender with your complete financial history, including your annual income, any debts and your total assets. Lenders consider construction loans riskier than other types of loans, so you need top credit.
2. Get Construction Plans
When it comes to new construction, the lender approves not only the loan, but the building plans. The lender will require the builder to provide bank statements and other references, as well as work history.
As for the plans, the lender will want to know not only the project estimates, but the schedule, the exact specifications and a myriad of other information. Keep in mind that seasoned lenders are well aware that construction projects are notorious for running over budget and behind schedule. That means you must prove to the lender you have the funds to deal with unexpected expenses.
3. Understand Construction Loan Rates
Interest rates on construction loan rates vary, as they move up and down with the prime rate. Expect to pay a higher interest rate on a construction loan than on a traditional mortgage. The construction loan itself is short, usually for one year or the time required to build the new project.
4. Be Ready With the Down Payment
Don’t expect to borrow the entire amount of the cost of new construction. The lender will require that you contribute a certain amount of equity to the project.
5. Find the Right Lender
Banks aren’t the only option when it comes to obtaining a construction loan. Finding the right loan at the best rates is your goal, but that takes research. Besides banks, look at the rates and terms offered by credit unions, savings-and-loan associations and private money lenders like Builders Capital. Just make sure you choose a lender experienced in construction loans, as building is often a complex process.
Jane Meggitt’s work has appeared in dozens of publications, including USA Today, The Alternative Daily, nj.com, The Houston Chronicle and The Nest. She is a graduate of New York University.