The requirements for new construction home loans have changed over the years and are in a continual state of change. They may also vary by area and individual banking institution. Below are common questions regarding requirement for new construction home loans I often get asked.
Requirements for New Construction Home Loans Top Question One: Why do lenders use FICO scores to help determine eligibility for loans?
FICO scores were not always as important as they have become in recent years, but the proof of their accuracy is hard to argue with. While 50% of people with low FICO scores (below 550) became 90 days delinquent while only 2 in 10,000 people with a FICO above 800 became delinquent. Since FICO is such a good predictor of outcome, no wonder they use it.
Requirements for New Construction Home Loans Top Question Two: What makes a FICO lower?
Delinquent bills, failure to pay bills or defaulting on payments in the past will cause a low FICO score. Bankruptcies, liens and judgments also lower your FICO score. Having a short credit history is also a problem. One of the biggest surprises for those who think they are “good at credit” are the FICO penalties for too may revolving accounts (credit cards.) Credit cards mess up FICO more than they help but just one or two cards which you pay off regularly an on time can really raise your FICO. Not maintaining a balance is the most optimum way to use your card to increase your FICO, along with checking into any unpaid bills you may not be aware of.
Requirements for New Construction Home Loans Top Question Three: Is my FICO good enough?
The better your FICO is the lower your interest rate, and the better your chances of getting a loan. Banks consider many factors in issuing loans, so a lower FICO might be outweighed by high income, or a large down payment. If your FICO is below 550 you may not be able to get a loan. If your FICO is 750 or above, you may qualify for a better interest rate.
Requirements for New Construction Home Loans Top Question Four: How much must I put down?
It depends on the type of loan, and the terms you get. If you qualify for a FHA loan, you could get by with as little as 2%. Veteran’s loans are no money down at all. Otherwise you should count on needing 10% – 20% down payment. It is a good idea to go into the loan office with close to 20% of the cost of the home in your bank account, whether they require you to use it all as a down payment or not. In other words if you wish to borrow $250,000 you can feel confident if you have $25.000 or more in savings. If you have less you may be required to purchase private mortgage insurance.
Requirements for New Construction Home Loans Top Question Five: What factors, other than my credit score are used when considering my loan?
• You must have worked at your current employment for one year at least. Two if you are self employed.
• You must have hired a reputable contractor or home builder, or be fully capable of doing construction if you intend to do it yourself. The bank wishes to be assured that the home, which will be used as collateral, is marketable when completed.
• The value of the lot will be considered. It is easier to get 3 million dollars to purchase a lake front house, than it is to get a 200K loan to build a home in a slum.
• Your income must be sufficient to make payments.
• You must not have other excessive financial obligations which could result in default.
Perhaps the question is, how much should you borrow. Traditionally total debt payments cannot exceed 1/3 of your income. In recent years some institutions will allow mortgage payments to exceed ½ of your income. If this is the case with your lending institution, it may be important to use common sense to consider your own situation. Could you pay half of your income as a house payment and still live securely? Could you cover your utilities? What would happen if you lost your job? Sometimes in choosing an amount to borrow, it is better to be a bit cautious than to take the biggest loan they can give you. Save a little for vacations, and going out to eat. No one wants to have to eat Ramen noodles for 30 years, just so they can live in a million dollar house.
In most cases construction loans can be adjusted to your situation, and can be arranged with terms that suit your needs as long as you have good credit, a good work record, and a sufficient income. Requirements for new construction home loans vary and can be tailored for your situation.