Understanding Common Construction Loan Requirements
You’ll need approval for a loan before receiving the money you need to begin with your building project. The loan will not be collateralized or secured by property; therefore, the process is usually more rigid and strict than other loans and mortgages.
In addition to enforcing usual borrower conditions, lenders will examine and approve your budget, the approximate construction period, and the architectural blueprints of your project before approving the loan.
This blog will guide you on the prerequisites to get a construction loan approved.
Good to Excellent Credit Ranges
To minimize risk, lenders only accept the application for construction loans when the borrower has a credit rating of 690 or better.
That’s the least; other lenders may insist on a 730 or higher credit score. Consider improving your credit score to minimize the chances of your construction loan application getting rejected.
Money to Repay the Loan
Apart from having a good credit history, you should also have funds to manage payments on your current debts as well as the new mortgage you’re taking out.
Your lender will ask for financial documents and other documentation confirming your yearly earnings to verify this.
A Low Debt-To-Income Ratio
The ratio of all your monthly debt payments to your gross monthly income is known as the debt-to-income (DTI) ratio. The lower your DTI, the better it is because you’ll have more money in hand every month to pay off your loans.
To approve construction loans, money lenders look out for a Debt-to-Income ratio that’s less than 45% to increase the probability of borrowers making their payments.
At Least 20% Down Payment
When seeking a construction loan, you are normally expected to put down a 20% down payment. Many lenders even demand a higher percentage—between 25-28% of the construction expenditures.
Depending on your lender, you might have to pay private mortgage insurance if you make a down payment of less than 20%.
Project and Construction Budget Approval
The uncertainties and risks involved in constructing a home compel lenders to check all details about the upcoming project.
You must submit documentation such as a signed construction contract, payment schedule, comprehensive designs and specifications, and deed or purchase offer to increase the chances of your loan getting accepted.
Approval from the General Contractor or the Builder
You’ll also need to prove to the lender that your builder and architect are insured, licensed, and qualified. Proof of financial stability resumes, insurance certificates copies of the builder may be required.
You should also explain each party’s responsibilities, such as the architect’s and the general contractor’s role in the building project.
If you’re looking for construction loans for your next investment, consider reaching out to Commercial Private Equity!
At Commercial Private Equity, we provide private specialized loans, including workout loans, raw land loans, construction loans, and bridge loans. To make loan acquisition easy for our clients, we also have a three-level loan program with different loan requirements
Contact us now for more information.