If you’re interested in building your own home, a construction loan can provide the financing you need. However, you’ll need to follow your lender’s requirements closely if you want to be approved.
Lenders typically require a credit score of 680 or higher, a down payment of 20% to 30% and a debt-to-income ratio of no more than 45%.
Interest Rates
Interest rates on construction loans are usually higher than traditional mortgage loan rates. These rates are typically a few percentage points higher because borrowers do not have a property to secure the loan, and lenders tend to view these as riskier loans.
There are two types of construction loans: those that finance only the construction phase and those that blend a construction loan with a permanent mortgage. Those that only finance the construction phase have rates that are generally 5% to 10% higher than traditional mortgage rates for a permanent loan.
Home equity lines of credit, or HELOCs, are another option for home builders. These are revolving lines of credit that allow a borrower to draw funds during a certain period and repay the principal and interest over a longer period.
When shopping for a construction loan, it’s important to find a lender that offers competitive interest rates and has a strong reputation. Having a good credit score and debt-to-income ratio are also important.
Down Payment
Building a home is an exciting and rewarding process, but it also comes with some complications. You may have questions about the down payment needed for construction loans or how you can get a construction loan with bad credit.
Most lenders require a down payment of at least 20% when you apply for a construction loan. This is because the lender needs to be sure that you have a plan for building the house, so you can repay your loan.
Lenders also like to see that you have a good credit history and a strong debt-to-income ratio before they will approve your construction loan. In addition, all lenders will ask for financial verification documents to ensure that you are financially capable of repaying the loan.
Appraisal
One of the most important steps in obtaining a construction loan is getting an appraisal on the home you plan to build. This appraisal will be used by the lender to assess the value of your property.
The appraiser will use a number of different factors to determine the value of your future custom home. This includes a detailed building plan, cost breakdown list and spec sheets from your builder.
In addition, your appraiser will need to find comparable homes in the area to compare your new construction to. If the appraiser cannot do this, your construction loan may be denied.
Appraisers also need to take into account the location of your lot, which can have an impact on how many similar homes can be found in your area. For example, if your lot is in an urban setting, the appraiser should include at least three other homes a half-mile or less from your new home.
Lender Requirements
Construction loans Colorado are designed to help borrowers buy land and pay for the construction costs associated with building a new home. This can include buying materials, drafting plans, securing permits and paying for labor and building supplies.
Construction loan requirements vary from lender to lender. But most require a minimum down payment of at least 20% and credit score of 680 or higher.
Lenders will also take into account your choice of builder, as well as a detailed construction plan that includes a signed contract, blueprints and a budget for the project. They may also want to see any financial documentation you have that demonstrates a history of strong credit and a good debt-to-income ratio.
Getting your construction loan application in order can make the process go smoothly. And if you’re not sure about whether or not you qualify for a construction loan, our mortgage experts are here to help! Call or visit your local Total Mortgage branch today.
