You want to build, renovate, or flip your home. But only one thing stands in your way – you don’t have enough money. Well, here’s some good news. Lenders can offer you a construction loan to complete your project. But first, you must qualify for one.
And to know whether you do, you will want to ask yourself the following questions.
1. Have You Contracted a Licensed Builder?
If you haven’t contracted a licensed builder, forget about getting a construction loan. Remember, lenders may offer construction finance for a variety of projects. But they never risk their money unless a licensed builder is involved. Not only that, the builder must have a solid building and profitability record, which you must present to the lender. Now, where does that leave you as a DIY enthusiast? With one choice. Hire a professional builder even if you’re a qualified builder yourself or you’ll have a hard time qualifying for a construction loan.
2. Have You Compiled the Building Details?
Lenders expect more from you than just hiring a licensed contractor. They also require that you provide specific details about your project. Among other things, they want to see detailed floor plans, comprehensive materials inventories, and even cost projections.
And if you leave out any important detail, they assume you’re hiding something and, therefore, reject your application. This puts you in a fix, especially if you lack building experience. How do you know what to compile or leave out?
Here’s where the qualified builders come in. Before undertaking any construction, they first compile its specifications in what’s known as a Blue Book. Simply hand one of the many copies they make to the lender.
3. Have You Had Your Home Appraised?
To determine how much money to lend to you, a lender needs to know the exact value of your home. For renovations or fixer-uppers, that’s an easy thing to do. But what about a home you’re planning to build? How do you estimate its value yet it doesn’t exist? You don’t. Instead, you hire an appraiser to do it for you.
Remember that Blue Book we’ve just mentioned? Appraisers use the specifications within it to calculate the value of your home or project. They then hand you an appraisal report, which you in turn hand to the lender.
4. Have You Saved for the Down Payment?
Even after approving your application, most lenders will never disburse your loan immediately. Instead, they first demand a downpayment of 20-25 percent for two reasons. One, with money put down, you’re less likely to abandon the project midway, leaving them with losses.
And two, the payment allows them to recoup their losses if your project stalls, falls behind schedule, or is worth less than it cost to build. So have you saved enough money to put down? If not, start now.
5. Can You Prove Your Ability to Pay?
Besides the money down, lenders need one more thing as security – proof that you can pay off the construction loan. For starters, they pull your credit report. And if it’s bad, they reject your application immediately.
But if it’s not, they then demand copies of your latest paychecks. Only after being fully satisfied that you can pay do they finally hand over the money. Lenders are often willing to offer you a lending hand in your construction project. But in return, you must prove you’re not a risky investment. Or, they’ll reject your application.