We do Construction Loans! Not everyone does them. In fact, I’d venture to say that most traditional mortgage companies don’t do a traditional construction loan. But, we like to try to help our real estate clients with whatever their home needs might be, so we can take care of your construction financing needs at any time.
What do I need to know about doing a Construction Loan?
First, you should know that from a risk perspective a construction loan is about the riskiest kind of loan that a financial institution can make. Why is that? Because there is a ton that can go wrong when your house is being built. A quick list of things that could derail a construction loan being converted to a permanent loan: Builder messes up the house, builder goes insolvent, builder quits, client fires builder, house isn’t worth what everyone thought it would be worth during the building process, borrower gets fired, borrower quits job, borrower gets divorced, borrower starts making late payments on other obligations and borrowers credit score goes down, borrower dies, budget gets busted when borrower and/or builder overspend on the project and they run out of money to finish the house, subcontractors don’t get paid for their work and file liens against the property, plus, probably another 100 things that could go wrong that I didn’t just type out based upon 17 years experience in the real estate business.
So, a financial institution when presented with a Construction Loan wants to make sure that they mitigate as many risks as possible. This means that in order to qualify for a construction loan you will need the following:
1) Credit Score of 700 or higher- or a really good reason why it’s not. Ex- I had a client get a construction loan with a 690 credit score because her credit was completely pristine but for a red light ticket that got reported to a credit bureau agency as a collection account. This is the only instance I’ve had where a borrower got a construction loan with a sub 700 credit score- there might be others out there with a story like this- but you need really strong credit for obvious reasons
2) Low debt to income ratio- The bank doesn’t want you to not be able to take out a permanent loan because you went to Lowe’s and bought a new lawnmower. They want solid ratios. 42% debt to income, generally, is the highest they will go. When you compare this to an FHA where you can go into the high 50’s, or a conventional where you can go into the high 40’s, you can see that this is a pretty conservative stance
3) Lots of money (yours) in the project. You need 20% equity in the deal. And that needs to be your 20% of equity. The first money that goes into the deal (or equity in the form of paid for dirt- we can get no money out of pocket loans if you have enough equity in the property that is being built on) is going to be your money. And it’s going to be at least 20% because the bank wants you to have some skin in the game so that they don’t end up owning your half built house someday.
How does a construction loan work?
After you understand that a construction loan is difficult to qualify for and for only the highest qualified buyers, you might wonder- how does a construction loan work?
It’s pretty simple really- the bank approves the borrowers credit, and approves the builder, collects plans, and orders an appraisal of what the proposed project will look like. They sign off on the money involved and typically give the builder a draw at closing to get started on the project on stuff that might not show up in an inspection (plans, permits, clearing land etc) and everyone gets moving. Then, the builder builds, the bank has the property inspected (for completion, no quality) and the buyer signs off, and the builder gets paid at various markers for work done in the project. Then, upon final completion of project the borrower gets traditional financing to pay off the construction note. During the construction process the borrower has been paying interest only, only on the money that’s been drawn on the project, on a monthly basis. Later, the traditional loan will pay off the construction note in full and have traditional fixed terms associated with it.
Why would I want to do a construction loan- this sounds complicated?
Yes, not everyone can get a construction loan. You need stellar income/assets/creditworthiness and have to put your own money or equity into the deal. But, and this is a big but, this is the best and safest way for the borrower to build exactly what they’ve always wanted for a house, or to build it on a unique piece of property, as well as the only opportunity to really call the shots at every stage of the way. Certainly, buying a new house is exciting and a builder in a neighborhood selling customized houses gives the borrower a good option to make the house the builder wants to build suit their particular tastes. This is not the same, however, as customizing the entire process and not having to make a single compromise on what the borrower might want from their dream house.
How Can I help?
We work with you to get you exactly what you want. If that’s a custom build job, on your own land, exactly how you want it to happen we can make sure that you have the financing to make that dream of today a reality in 9 months or a year or however long it would take. If you’d like to build a house and want to see how we can help you finance your dream please feel free to call me at 832-557-1095, email me at firstname.lastname@example.org or apply here now!