5 Tips for Getting a Mortgage When Building Your Home
Starting the Process for a New Construction Loan
There are several benefits to building your home instead of buying one. Your budget is flexible, you have full control over the design, you won’t have to deal with renovations, and you can incorporate the latest energy-efficient technology in the design and construction.
Despite all the advantages of building your own place, financing such a project can be a challenge. If you don’t have a substantial sum of money at hand, chances are that you will need a new construction loan. Fortunately, successfully applying for a construction loan comes down to a simple process:
Take a Look at Your Credit Score
Since a construction loan is similar to any other type of mortgage, your credit score is significant in determining whether your application will be successful. Get your credit score from all three credit bureaus, namely Halifax, Experian, and Trans Union.
Get Your Documents Ready
In addition to your credit score, get your FICO score from at least one of the credit bureaus. Then, gather all your financial documents that contain your day-to-day expenditures, annual income, debt, fixed and current assets, and 401k funds.
After gathering all your documents, find out how much you can borrow with a pre-approval. Remember that the loan amount should be sufficient to cover the construction costs as well as the mortgage for the land.
Get a Signed Plan
To get a signed plan, you need to find a reputable builder and secure a piece of land. The endorsed plan should include all the necessary information to apply for a loan, including specifications, materials, and a signed construction contract with beginning and end dates.
Apply for the Construction Loan and Mortgage
Furnish your preferred credit provider with your proposal to apply for a home construction loan. You can also apply with your builder’s preferred lender. If you don’t have the option of combining your construction loan with your mortgage payment, apply for separate mortgage financing.
5 Tips for Securing a Loan When Building Your Own Home
Seek a Construction Loan (Not a Standard Loan)
Applying successfully for a standard loan to buy an existing house is relatively easy as long as you have a steady income and a good credit score. This is because an existing property is literally as safe as a house. Not you or anybody else can pull a disappearing act with a current structure.
Getting financing for a building that doesn’t exist yet involves a higher degree of inherent risk. Construction loans are formulated to mitigate some of this risk. A construction loan is a short-term loan that covers the building costs.
Once the construction project is completed, you can refinance the construction loan into a permanent mortgage or apply for an end loan.
To increase your chances of a successful construction loan application, have all the necessary documents ready to prove to your credit provider that your construction project is sustainable and that it carries low risk.
In addition to your financial documents, you have to prepare a project timetable, a realistic budget, and a list of all the relevant construction details, including building materials, floor plans, and other building specifications like insulation and wall heights.
If you work with an experienced builder, they may have a so-called “blue book” that includes all the details that credit providers may typically need.
Have Your Down Payment Ready
Because construction loans are inherently more risky than standard loans, expect to pay a high down payment. Construction lenders can require a down payment that ranges from 20% to 25% percent to ensure that borrowers don’t step out of the transaction.
If you are not prepared to pay the down payment, you may find yourself having a severe cash flow problem.
If you already own a piece of land or vacant lot, you only have to worry about the construction loan. If this is not the case, however, you have to include the sale price of the land in the total amount of the construction loan.
If you include the cost of the land in the construction loan amount, your down payment will be much higher as will be the case with the construction costs alone. It is, therefore, advisable to pay for the land upfront.
Work with a Qualified Builder
To apply successfully for a construction loan, you have to prove that you have a qualified builder on board. A qualified builder is a licensed general contractor that has a reputation as an established and reputable home builder.
To find a qualified builder that delivers high-quality building services and that is known for completing work on time and within budget, visit consumer websites, community groups on social media, and ask your friends and family if they can recommend a builder they worked with in the past.
If you want to build the house yourself, you may have difficulty securing a standard construction loan. If you are not willing to work with a builder, consider applying for an owner-builder construction loan.
Qualifying for an owner-builder construction loan can be challenging, but if you can prove that you have the necessary skills and experience or that you are a qualified builder acting in your personal capacity, it may be a real possibility.
Many people may find building their own homes to be the perfect solution to accommodate their lifestyles and give rise to their unique ideas.
Perhaps the most daunting challenge about building your own home is obtaining a construction loan. To increase your chances of applying successfully, make sure that you prepare all the necessary documentation, that you save enough money for the down payment and try to purchase land upfront.
The most critical step to ensure that you are successful in your construction loan application is to find a licensed builder that has ample experience in construction loan applications.
If you want to build a home in or around Houston, contact Picklo Homes and discuss your dream home project with our skilled and experienced team.