Thinking about building the house of your dreams is an exciting prospect. Financing, however, can seem rather intimidating. One way you can finance building a home is through a construction loan. A construction loan is generally a short-term loan you get to cover the cost of building. Once built, you can then get an “end loan” to pay off the construction loan.
Steps for Getting a Construction Loan
Pre-qualify for a construction loan: The lender will decide if the loan amount you need is within your budget.
Shop around for a construction lender with experience: Whether you go with a national lender or local bank, ask about specific experience with construction loans.
File the loan application: This form will yield the debt to income ratio for the lending officer. Debt payments should not surpass 36% – 45% of income each month.
Sign a contract with a line-item cost breakdown: The line-item cost breakdown should be referred to at all times and can be updated if the homeowner wishes to change specifications.
Get insurance: Bank lenders will require two types of insurance: course of construction insurance and general liability insurance. A third type of insurance, workman’s compensation insurance, is required if the contractor owns his own company and has employees.
Get a copy of the estimated construction loan budget from the lending officer and review it: Though customers usually don’t get this document, a lending officer should be able to provide it upon request. It details every cost within the loan.