The steps required for a home construction loan may vary according to your specific situation, and how you plan to build your home. Each situation seems to have its own Achilles’ heel. Bad credit, no savings, low income, self employment, unsteady income sources, and frequent job changes are all elements in your life which could potentially derail your efforts to get a loan. Almost everyone has at least one of these factors to deal with, but in order to obtain a loan, all or most of these situations must be either fixed or compensated for.
The preparation period should be a period of about one year, in which you work to clear up the problems listed above and plan your future home. How long your preparation period takes depends on your situation, but it is never too soon or to late to start preparing your finances. In order to prequalify for a loan, you must address these issues.
1) Clean up your credit. Find out what your credit rating is and take steps to improve it. Pay off old debts. Keep your utilities paid on time and pay off the balance on your credit cards. Stop maintaining a balance, but if you have cards, do not cancel all of them.
2) Pay off any other loans or lines of credit you may have. Pay off your car, pay off small bank loans and furniture payments. Don’t leave any sort of payments on time in your monthly budget.
3) Make practice house payments to a savings account for one year prior to obtaining a loan. Try to save at least one third of your monthly income. If this is too difficult drop the amount to one quarter of your income, but then in applying for a loan, you should not sign up for more payments than you can afford to save now. This is a very accurate way to think of prequalifying.
4) Keep the same job for over one year. If you are self employed, you must have kept the same business for at least two years. You will have to present your tax statements as proof of income, so do not underestimate your income on your tax returns and expect to overestimate them for loan consideration. All self employed people know that income is relative when running a business. Be sure to consider whether you really want to claim all those expenses this year. If you own an S corporation, you may want to increase your own salary above your normal expenses.
Any home builder, any realtor or loan officer can help you through the prequalifying process. Prequalifying is simply establishing that you are qualified to obtain a home loan, and exactly how much money you qualify to borrow.
1) In order to borrow money, you must have had the same job for more than one year, or the same self employed business for more than two years. You must have proof of income, either by W-2 or your income tax return form. If you are buying a home with your spouse and need both your incomes to qualify, then both of you must meet the above requirements.
2) Any monthly credit payments you make will be subtracted from your average monthly income.
3) One third of your monthly income, minus monthly credit payments will be calculated. This is the maximum amount you can conceivably pay for a mortgage payment. Your construction loan is similarly estimated, because you have to have a mortgage loan to pay for your construction loan.
4) The amount you have as a down payment will be considered. In general, unless you have at least a 20 percent down payment, you will not qualify. However if everything else is in order, your home builder, realtor or loan officer may be able to find a work around. If you qualify for an FHA or VA Mortgage for example, the bank may wave the need for a large down payment.
*One note about prequalifying – When you discuss finances with a home builder or realtor, they may assume that you wish to borrow as much as possible, but think of how hard it was to make those practice payments, and consider prequalifying for 25 percent of your income rather than the standard 33 or 35 percent. This may be a more realistic figure for your family.
There are many sources or home loans. Mortgage brokers, and most banks offer home construction and mortgage loans. Your home builder may have a lender that they routinely use as well. Always choose the lowest mortgage interest rate you can get, and whatever construction loan you can obtain that will work with it. In general, it is much better to choose the two loans at once from the same company and close both at the same time. In the past, people chose their lender, largely on mortgage interest rates, but recent events show that you should also consider the overall reputation of your lender. Investigate your lender, and learn all you can about their role in the foreclosure crisis, to avoid loosing your home unfairly. Do not deal with banks who played a role in unjust foreclosures. Also inquire about the likelihood they would sell your loan to another lender. This is common practice, among some lenders, but it should be avoided.
Your home builder and the loan officer will help you to fill out all the necessary paperwork correctly. Be sure to use accurate figures and never guess on an answer. Always present factual and accurate information on your loan application, because the lender will check on all the information, and decline your loan if you have stretched the truth on any point. It is much better to tell your loan officer or mortgage broker if there is one aspect of the loan you do not qualify for. They may be able to direct you to another loan that would work better for you. Your home builder will also have to submit paperwork to the loan officers. He will have to present the blueprint and his plan for building the home. You must bring W-2s and other proof of income, and carefully fill out forms. When you have questions, ask the loan officer.
Once you have filled out the paperwork, you must wait for weeks to find out whether your loan has been approved. This can be very stressful, but this only proves that every single figure on your loan application will be scrutinized and proved to the lending institutions satisfaction, before you receive your loan. Once you are approved for your loan, construction may begin. For more information on the steps required for a home construction loan please read our 98 page free book and read the many articles on this site.