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Tips for Getting a Construction Loan

Do you want to know what the biggest hurdle is for people starting construction projects? It's financing. For many, it takes more than one application before they are finally able to secure the money they need to start building their dream home or commercial property. People will often think that the loan process is long and complicated, but it doesn't have to be that way. If you understand the loan process and how it works, you can easily get a construction loan.

The following are some tips for getting a construction loan:

Start earlyApplying for a construction loan should be the first thing on your mind when you start building. It is very important to tell the lender the purpose of your loan because it could lead to you wasting time and resources if you don't qualify for a construction loan. There are some borrowers who may qualify for one type of loan, but not another.

Prepare for documentation – It's common for a lender to want verifications of income, assets, and expenses, so you’ll want to have everything organized before applying.

Look at multiple lenders – A lot of times, people will only apply for a construction loan with one lender because they feel they have a better chance with them. But that can cause problems as different lenders use different criteria.

Keep the property – One of the most important things you need to know is what happens if you can't get financing on your own? Are you able to keep the property anyway? If not, then it may be wise to find a partner who can provide the financing.

Don't be discouraged – Even if you have been turned down once, it doesn't mean you won't get the money somewhere else. You can also explore other alternatives, such as buying the land in cash and just financing the build itself.

There are a number of requirements for getting a construction loan from different banks. Even within the same bank, there could be some differences in the qualifications, depending on who you talk to.

What is the purpose of the construction loan?

A lot of lenders will not be able to fund loans that are for development purposes. Lenders are typically concerned about over-leveraging properties and they would rather have a more traditional purchase or refinance transaction. Keep in mind that some banks may have more relaxed lending guidelines than others, but there are some that will not lend on properties for development or construction.

Who is the primary borrower?

You need to know who the primary borrower is because you will need his/her income to qualify for the construction loan. Also, if it is a joint application, both borrowers should be equally able to make decisions on behalf of the property. Most lenders require that the primary borrower be one of the following:

  • W-2 employee with several years of employment. The borrower's income should be consistent enough so that it can be documented with tax returns.
  • Self-employed (most lenders will want to see two years of tax returns that show continued income; some lenders may require three years or more)
  • Military or government employee. Although the borrower's income may not have been consistent over the years, some lenders will allow him/her to qualify on active duty pay even if it is inconsistent.
  • Retired (age requirement varies)

Making a decision

A new home construction may or may not be the best option for your next home purchase. If you qualify for a construction home loan and you have a specific vision for your new home, go for it. Otherwise, you may want to consider buying an older home and renovating it, which can be a good compromise. This way, you can still get the home you’re after, but you’ll have more mortgage options.

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