Construction loans are short-term loans with variable rates, (that fluctuate with the prime rate) and have a maximum of one year. They are designed for two types of borrowers, prospective owners or home builders. The rates are typically higher than those of a permanent mortgage loan. One of the main advantages of the construction loan is that it gives the borrower time to finish building their home and not to mention that lenders typically don’t let you borrow against something that doesn’t exist yet.
To be approved for a Construction loan you will have to meet certain requirements regarding your income, credit, debt, and your available cash on hand. Any lender will have to verify your monthly or annual income by reviewing your last two tax returns. Your credit score is a major factor – as income alone is not enough to obtain a construction loan. While the exact credit score can vary from lender to lender, you will most likely need a minimum credit score of 680 to qualify. Generally speaking the higher your score, the better the terms/rates of the loan will be.
Many Americans have outstating debt, so it may not disqualify you. But if you have too many prior outstanding debts it can disqualify you. The roundabout rule is 45% – meaning that your debt-to-income should not exceed 45%. According to Finance Zack “this ratio is calculated by dividing your total debt payments divided by your total debt payments by your gross monthly income” (Finance.Zacks.com).
Cash on Hand
Construction loans typically require a sizable down payment, which can range anywhere from 20 to 30 percent of the total loan. According to Finance Zacks in addition to the down payment “the lender may require six months of principal taxes., interest, and insurance payment on the loan” (Finance.Zacks.com). The borrow can offset the amount of cash if they own land that they can use as equity.
If the borrower is approved they will be placed on a bank-draft or schedule that projects the timeline of the construction stages. The borrower will typically only be required to pay on interest payments during construction. A series of inspection will be conducted during the construction process to ensure that the project is meeting expectations and is up to code.
Construction loans can be great for those who are prospective home owners or home builders. But the guidelines and qualifications can be a bit daunting for some potential borrowers. If you have any questions or concerns, please contact one of our specialists who will be happy to go every aspect of your construction mortgage.
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