How to Qualify for a Construction Loan?
- 1). Verify your income by providing your lender with all income sources and proof of your income, including W-2s, tax returns and paycheck stubs. At the time of application, the lender wants to be sure you have the funds to pay back the loan.
- 2). Maintain a high credit score to show lenders you are a trustworthy person. In most cases, a credit score over 700 is best, though some lenders will accept lower scores if an individual meets other qualifications.
- 3). Keep your debt-to-income ratio as low as possible since this is an indication to lenders of how much credit you depend on. To lower it, reduce your credit card or other loan balances as much as possible prior to applying for the loan.
- 4). Have the required down payment, which is usually at least 20 percent down on the purchase price of the home. In a construction loan, you may need to pay this amount at the start of the construction process, at the time the loan is approved for construction.
- 5). Hire the right contractor for the job, since the lender must approve the company before it agrees to fund the loan. You might even want to ask the lender about construction companies, architects and general contractors they have already approved to expedite the process.
- 6). Work with your home designer to design a home that is within your budgeted amount, provided by the lender after initial approval of your application. Before the loan can be funded, the lender will have an independent appraiser look at the plans to determine if the value of the property will meet or exceed the borrowed amount.
- 7). Obtain approval for the construction loan from the lender after the construction company's proposal is accepted and the building process begins. The loan is then finalized after the construction process has been completed, assuming the home's value meets with the lender's approval.
