Qualifying for a Construction Loan- What Lenders Review

When borrowing money for building a house, you may not need collateral for backing up this loan the way you would with a traditional mortgage. As such, some lenders are nervous about issuing construction loans. Therefore, your first step is to jump through additional hoops to have the lender accept your application. Essentially, your architectural plans, builder and finances will undergo thorough inspection.

Just like with a traditional mortgage, maximum debt to income ratios, down payment requirements, and minimum credit scores will vary from one lender to another. Usually, these are based on the amount that a person borrows. Nevertheless, there are several factors that most lenders review.

These include:

  • Credit score- Before you are given a construction loan most lenders will consider your credit score. Most lenders require borrowers to have a credit score not less than 680.
  • Debt-to-income ratio- Generally, lenders expect borrowers to have debts that total to less than 45% of their income. A percentage lower than this is even better.
  • Down payment- For new constructions, lenders require a down payment of between 20% and 30%. However, a renovation loan can accept a percentage less than this.
  • Repayment plan- When borrowing a construction loan, your lender will want to know how you will repay the loan. For instance, they will ask whether you will clear the balance through a refinance or cash once the house has been completed.

Don’t forget that building your dream home can take a longer time. There are also many moving parts of the process. Therefore, be careful when selecting your home building financing option. There are lenders that do an excellent job in managing builders and borrowers’ expectations. It’s recommended that you choose a construction loan lender that is willing to lend you via a process that has minimal frustrations.