If you are planning to build a brand-new home or even a commercial space then you should seriously think about taking out a construction loan. When you do, you will soon find that you are given the means you need to not only start the project, but to also complete it. When you take out a construction loan, you will be given some money that will pay for your materials and for the labour during the construction phase. Your lender will disperse funds at different intervals so that you can cover everything. During this time you will only be paying for the interest. When you have a contracted builder complete the property, your lender will then convert the construction loan you have into either a commercial property loan or a traditional residential loan. This, of course, depends on whether your loan is for a commercial building or for a residential building.
Loan Income Requirements
Before you even think about applying for a construction loan, you have to make sure that you look at your income. Construction lenders will normally verify your income before they even think about approving your application. When you go to your loan provider, you will have to list your monthly or even your annual income, depending on what provider you decide to go with. You will list your income before tax in most cases. Some providers will also ask you for your most recent tax return and a pay check stub. If you happen to be self-employed then they may ask you for your tax returns over the last two years. Getting a loan if you’re self-employed can be more difficult but it’s certainly not impossible. If you want to give yourself the best chance of coming out with the best deal then you need to try and look at the lenders that are available to you, before comparing the interest rate that they are going to offer you as a self-employed worker.
Credit History and Score
Your credit history and your credit score will factor into the decision as well. You might have a very high level of income and this is great, but if you have a bad credit score then this shows that you are not good with money and therefore are higher risk. Loan companies have very specific requirements, and the higher you can get your credit score, the better. You should really be aiming for a credit score that is 680 or higher if you want to take out a construction loan. So if you have ever wondered, “what are the requirements for a construction loan approval?” then this is one of them. Of course, the higher your score is, the better interest rate you will be offered and the better terms you can expect as well so it’s really important that you are able to keep this in mind if you can. Of course, if you want to look at your own credit score then you’ll be glad to know that you can do this online with ease and that you can also view some of the many factors that might be affecting your report as well. If you believe that your credit score is not going to be high enough for you to qualify for a loan, then you need to try and work on improving your credit score. Believe it or not, little things like paying your bills on time and even reducing your debt can help you significantly with your score and it can even put you in a much better position overall.
Your Prior Debts
Having too many debts can also stop your commercial construction loan from being approved. A review of your credit report by your construction lender will easily reveal your current balance on your credit card and any other loans that you might have. If you want to qualify for something like a construction loan, then you have to make sure that your debt and income ratio doesn’t go over 45%. This is the percentage of your income that is going to go towards your debt every month. If you want to calculate your ratio then you need to divide your total debt by your gross monthly wage. For example, if your debt is going to be $4,500 per month and you are able to bring in $6,000 a month then your debt to income ratio is going to be 75%.
Cash Balance
Obtaining a construction loan will probably mean that you need to have a large cash reserve. You need to have some cash for your down payment and this can range between 20-30% of your loan balance. Additionally, it’s important to know that the lender may require 6 months of tax information, insurance payments and more. If you know that you have some land and that it is ample equity then you can even use your land as a down payment on the loan if you want. This will put you in a very strong position overall and it will also boost your chances of getting approved for the loan.
Other Guidelines
Even if you are able to meet all of the general guidelines for the construction loan of your choosing, it’s important to know that your lender will not actually approve your loan unless you are able to give them information about your construction in general. You can include a land purchase in your construction loan but if you have some land already then the lender will require proof that you own it. This can be done in the form of a land deed. The lender may also require a solid estimate from the builder as this will provide them with a breakdown of the construction costs. This will include things like the labour, the equipment, the materials and more. Finally, the contractor’s license will also need to be given as proof.
By following this guide, you can then easily get the loan that you want from your local provider so do keep that in mind.
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