If you are lucky enough to find a lender willing to give you a construction loan, be prepared to provide a large amount of documentation. Construction loans are risky for lenders because there isn’t any collateral for the lender to hold onto should you default on the loan. The lender must make sure that you are a good risk before giving you the money to build a home.
So what do you need to qualify? Keep reading to find out what documents lenders usually need.
Proving Your Income
Lenders will pay a lot of attention to your income. They need to know that it’s consistent and reliable. In other words, if you just started a job one month ago, chances are a lender won’t give you a construction loan. On the other hand, if you’ve had the same job for the last 2 years and can prove it, you’ll have a better chance at approval.
Typically, lenders need to see paystubs that cover the last month of employment as well as your W-2s from the last two years. If you work for yourself or work on commission, you may also have to provide your tax returns from the last 2 years. Lenders need to see what expenses you write off, as they will have an impact on your net income.
Proving Your Employment
Despite the fact that you provide documentation proving your income, you must also prove your employment. The lender needs to know that your employment is reliable and stable. The lender also wants to know that your employment will continue for the foreseeable future.
Your employer can complete an official Verification of Employment form to prove your employment. Some lenders also allow employers to verify your employment verbally, over the phone. If you work for yourself, though, you will need a third party to verify your employment. Typically, your CPA can write a letter for you stating the date that you started self-employment and that he/she does your accounting for you will often suffice.
Providing a Construction Plan
You’ll need an official construction plan, not just something you threw on a piece of paper. Remember, the lender is loaning you money on something that doesn’t exist yet. They don’t have much collateral, so they need to know the ultimate goal for the funds in order to make a decision.
You may hear this called the ‘blue book.’ It’s basically all of the information the bank needs to understand your home plans. It should include not only the blueprints but also a timeline for each phase of the project. It should also include the cost of materials and specific measurements of certain areas, such as the ceilings. In short, you should provide the lender with as much information as possible in order to ensure that they feel comfortable lending you the money.
Paying for an Appraisal
This might seem odd, but you do need an appraisal on your ‘not yet built home.’ The appraiser will assess the land and evaluate the blue book. He/she will then look for comparable homes in the area to give the lender a ballpark estimate of the home’s value once it’s finished. Of course, this value could change depending on the timeline of the construction, but it will give the lender a good idea of what to expect.
Making a Large Down Payment
One of the best ways to ensure your approval aside from having great credit and a low debt ratio is to make a large down payment. When we say large, we mean 20% – 30%. If you put anything less, you really put the lender in a bind, making it difficult for them to want to lend you money.
The down payment shows the lender that you are invested in the project. In other words, you aren’t just going to change your mind and walk away from a half-built home. The lender wants to see you invest your own money so that you have a reason to stick around even if things start to go awry.
Getting a construction loan does take a little more time and sometimes some creativity on your part. Talk with several lenders to see their take on construction loans to see what options you have. Many loan programs including conventional and VA loans have construction loan programs, but not every lender allows them. Shop around and find the lender that is right for you.