Getting Pre-Approved For a Construction Loan

Getting Pre-Approved For a Construction Loan

Before getting too far ahead with your plans to buy land and build, it makes sense to find out how much you can borrow.  Once you know your borrowing limits, you can tailor your design to your budget realities.

If you plan to start your project soon you can meet with a loan officer to gather information and get pre-approved. Pre-approvals typically only last for 30 to 90 days, depending on the lender, so if you are not looking to start your project that soon you don’t necessarily want to go through the formal pre-approval process. Still, it’s a good idea to meet with a loan officer to get some information on how to move forward and what you will need, and to get an idea on what you can be approved for.

Without a pre-approval you can waste a lot of time and money designing your dream project, only to find that it is not even in the ballpark of what you can afford.  Keep in mind that once you are in the ballpark, you will still need to make a number of trade-offs during the design process to keep within the budget (9-ft. ceilings vs. better windows, jetted tub vs. tile floor; etc.). Knowing what you can afford allows you to make better decisions. (read more – link to blog on website at this point)

You may decide that you want to add inexpensive unfinished space now, such as attic or basement, that you can finish later when you have more cash on hand.  This allows you to get what you want now and grow into your new home in the future.

The specific requirements to obtain a loan change from time to time and vary among lenders.  However, all lenders look at the same three factors: your credit score (FICO), your income-to-debt ratio, and how much equity you will be putting into the project. The higher your credit score and down payment the greater your chances are for approval.

Applying for a construction loan:

Applying for a Construction Loan

Once you’ve been pre-approved, the building appraises within the lending limits and you show up with the necessary documentation and a reputable contractor, you should have no problem obtaining the loan.

To apply for a loan, you’ll need the following, in addition to the standard financial information required for any bank loan:

  • Building lot details: a deed or offer to purchase with documentation of protective covenants and other deed restrictions
  • A clear description of responsibilities of the architect (if any), and the general contractor, construction manager, or yourself if you are an owner-builder.
  • The builder’s resume, insurance certificates, and credit and banking references
  • Complete set of blueprints and specifications
  • Materials list in the bank’s format
  • Line-item budget (schedule of values) in the bank’s format
  • A draw schedule (payment schedule) consistent with the lender’s disbursement procedures.
  • A Signed Contract, including start and completion dates and provisions for change orders

Make sure you have all of your documentation ready to go, this will make the process smoother with a quicker turnaround time.

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