The residential construction loan process would be confusing if there were not so many people to help you with it. Your home builder and the loan officers are all on your side in obtaining the loan. The best thing to do is be very frank with them about your finances. Local Realtors can also be helpful in seeking a loan. Never try to hold back information, or mislead your home builder or loan officer about your income, savings, credit score or other circumstances. No one can hide a credit score, an employment record, or financial information from a lending institution. Making your situation clear from the beginning will help you get a loan, because they will know the type of construction loan you need.
Unless you are extremely financially responsible, you should start preparing to get a loan at least a year before you apply. Work to increase your savings, pay off debts and improve your credit score. The best thing about the process is that all three elements work together. Paying off your debts will improve your credit score. Paying off your credit card balance before it is due each month will help you save money. Pay off your credit card debts as soon as possible, and never maintain a balance again. It costs a fortune to pay all that interest, and it ruins your credit score, especially if you are late on payments.
If the answer to all these questions is yes then you are ready to prequalify and apply for a loan. There is very little point in asking till you have at least 5 yeses.
• Are all your credit scores above 680?
• Do you have a credit score above 700?
• Do you have about 30% of the cost of the home you want to build in the bank?
• Do you have six extra payments in additional savings?
• Have you paid off all your cars, and any other monthly payments?
• Have you held your current job for at least one year?
• Has your spouse held his/her current job for at least one year?
• If self employed have you shown a substantial profit on your taxes for the last two years?
Most of the loan institutions have decided that no one should owe monthly payments exceeding 35% of your income. Some will allow up to 45%. This means that they will figure out 35% of your income, and subtract any credit payments you make monthly from that. The remainder is the maximum house payment you can make. They will then figure out how much you can borrow, based on the current interest rate, and an amortization chart or calculator. It is not necessary to borrow all you can though. If possible limit your monthly payment to a quarter of your income. That may be easier to come by if you ever find yourself out of work, or making less.
Bring with you, your W-2’s and if you are self employed the past two year’s tax returns. Bring verification of all your assets, a copy of your house plan and any other documents your builder recommends you bring. Some home builders will actually accompany you to the lending institution. Otherwise he will need to visit the lending institution at a different time. Your builder will need to be approved by the lender. The builder will have to fill out the forms that apply to him, and bring a copy of his insurance.
Ask the loan officer to assist you in filling out the forms, and make sure they are correct in all aspects. Do not gloss over any information that might make you look bad, such as an unpaid loan, or fib about your income. This can cause you not to get the loan, when it would have been fine if you’d told the truth.
If approved, your builder will have to work closely with the bank to present his complete bid for building the home, including all the bids by sub-contractors, and a very detailed list of materials, fees, and labor. An appraiser will look at the plans and the bid and insure that the house will be worth what you are paying for it, once it is completed. The builder will also have to submit a draw schedule to explain when he will be withdrawing different amounts of money.
It may take days or weeks for the lending institution to approve your loan. Once it is approved there will be a closing. A closing is a meeting between the buyer, the builder, the bank and any other interested parties, such as attorneys. Even though a construction loan is a separate loan from the mortgage loan, it is a good idea to get them both in one closing, so that the mortgage loan will be ready when you need it.
The construction loan keeps all money in an escrow account which can only be drawn on by the builder on the approximate schedule earlier prescribed. Usually he will make withdrawals no more than eight times. During the course of the loan, the buyer will not have access to the money unless they are acting as their own contractor. When the home is complete, any remaining money is returned to the bank, and never owed on the mortgage loan. The money owed is paid off by the mortgage loan, and the construction loan no longer exists. This is the end of the residential construction loan process and the beginning of the mortgage loan.