Purchase Options

construction loans

Building a home from the ground up can be a great opportunity to personalize your new space, but it can also be an expensive prospect. Luckily, construction loans provide the funds necessary to buy land and pay for the materials and labor that go into building a new house. Construction loans typically are one year in duration with higher-interest rates. During this time, the property must be completed, and a certificate of occupancy issued.

 

Construction Loan Eligibility. 

  Unlike traditional mortgages, construction loans aren’t secured by a completed house; therefore, the application and approval processes for a construction loan also are more complex than for a mortgage.  Anyone can apply for a Construction Loan, but all applicants must meet the following requirements: 

    • Proof of Verifiable Income and Employment History.  Applicants must be able to prove sufficient income to support the proposed house payment and other qualifying debt (see DTI requirements below).  In most cases, a two-year history of employment is also required.  There are a few instances where the two-year employment requirement is not needed (such as an individual who just graduated from school, a retiree or someone whose income is derived from disability).
    • A Minimum Credit Score of 680. In general, you should strive for a credit score of 680 or above when applying for a Construction Loan. As with any mortgage loan, the higher your credit score, the lower your interest rate.
  • Down Payment Requirement.  Most Construction Loan options require a minimum down payment of 10.01%. Keep in mind that any down payment amount less than 20% will require Mortgage Insurance.
  •  Debt-to-Income Ratio (DTI) Requirement.  Construction Loans typically have a maximum DTI of 43%.  Your DTI is calculated by totaling the minimum payments on all your recurring monthly debts (student loans, credit card and installment payments, as well as your new proposed house payment), divided by your monthly gross income – expressed as a percentage. For example, if your new house payment is $5,000 per month, your car payment is $879 per month, and your minimum monthly credit card payment is $526, your total monthly debt is $6,405.   If your gross income is $15,200 per month, then your DTI is roughly 42% (6,405 ÷ 15,200 = 42.13).
  • Mortgage Insurance (PMI) Requirement.   Making a down payment of less than 20% normally means you will need to pay for private mortgage insurance (PMI). This is true for Construction Loans as well.     
  • Eligible Properties.  You can finance all types of properties including primary residences, vacation homes, and investment properties. 

 

Applying for a Construction Loan

It’s easy. To get started, you will want to gather the following (that applies to you):

  1. Proof of income and employment (pay stubs, tax returns, W-2 statements, retirement statements Social Security statements, child support and alimony documentation etc.)
  2. Documentation of financial assets (bank statements, 401k statement, document of income from investments, etc.)
  3. Most recent two Residential history (Name and Contact information for current landlord, etc.)
  4. Identity information such as your unexpired Driver’s License and Social Security card.
  5. An Approved Contractor.

If you have questions and would like to speak to someone, give us a call at 832.946.8400.

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