The Dallas-Ft. Worth housing market is accelerating faster than builders can keep up. Whether you’re looking for an apartment, townhome, or a house with property, the competition is stiff.
Over the last two years, single-family home availability decreased by nearly 30%. This dramatic drop in availability leaves many people looking to build their own homes with a private contractor, like Cross Custom Homes.
However, before you start building a new home, you need to meet lender requirements for a new construction loan.
What Are Construction Loans?
To ensure we’re on the same page throughout the rest of this blog post, let’s discuss construction loans quickly.
A bank gives you a construction loan to finance your new home. There are several types of construction loans, and all of them have standards you must meet to receive a loan. You need to know one crucial distinction: construction loans are different from home loans.
Construction loans are short-term with a high-interest rate because of the nature of the build. Home loans, or mortgages, are for when you buy a home. In some cases, a construction loan can turn into a mortgage.
Let’s talk about those requirements.
4 Lender Requirements You Should Know About
Before a bank sends you a loan, they do their homework first. Since construction loans are expensive and are a considerable risk for the lender, banks require several documents to ensure you can pay them back on time.
#1: Verified Builder
Without a doubt, the first thing banks look for is that you’re working with a verified and credible home contractor, like Cross Custom Homes. A bank won’t speak with you until you and a contractor have agreed to work together and developed a blue book (more on this later).
Working with a reputable contractor gives the bank confidence in you and improves your likelihood of getting a loan.
Part of a bank’s willingness to give home construction loans is whether or not you can feasibly pay them back. They base a large portion of this trust on your income. In their mind, they’re asking themselves, “Does this person make enough money to pay us back with a 30-year mortgage?”
Although income can change over 30 years, and it most likely will, it’s essential to build a home that fits your budget and income.
#3: Credit Score
Closely tied to income, credit score plays a pivotal role in your ability to get a construction loan. Your credit score tells the lender how good you are at paying back your borrowed money.
Because a construction loan is often several hundred thousand dollars, you need an excellent credit score for a lender to trust you. In most cases, you need a minimum of 680, but many lenders prefer a score of 720 or higher.
#4: Blue Book
Before a lender approves a loan, they need to see your blue book. A blue book is a detailed plan of the home you want to build. This plan should include everything from the layout to the cost of the materials.
Without a blue book, a potential lender won’t meet with you.
Building a home is an exciting venture but one you must prepare for with diligence. To turn your dream home into a reality, you need a construction loan to help you jumpstart the building phase.
Qualifying for a construction loan is difficult, but if you plan, you can qualify. Make sure you work with a credible builder, have sufficient income for your loan, have a great credit score, and complete a blue book with your builder.
Once you complete these four steps, you’re ready to apply for a loan.