Getting a construction loan can be difficult, but the good news is that it doesn’t have to be. The right approach and advance preparation can result in the approval you’re looking for.

New home sales are on the rise, putting construction loans in great demand as homebuilders try to cash in on the limited supply of available properties. Here are four tips that will improve your knowledge of project financing and maximize your chances of approval.

  1. Confirm that you can afford to pay back the amount you want to borrow. Before going out to buy land, make sure you can prove to the lender that you are able to afford the monthly payments. They will also want to know your FICO score, how much (if any) money you have for a down payment, the extent of your construction experience, and how you plan to accomplish the proposed project.
  2. Investigate your financing options beforehand. There are different types of construction loans out there. One of the more popular options is the “one-time close,” which provides you with one fee schedule and one closing. You can also get a 12-to-18 month construction loan that will have to be refinanced into a conventional mortgage once the project is completed. This involves two sets of closing costs and two loans, but once construction is finished you can look around for mortgages that suit your circumstances and budget.
  3. Investigate interest rate options. Interest rates can be locked until construction ends, but they tend to be higher under this type of arrangement. If the rate remains the same after the project is finished and the loan is converted into a mortgage, you need to ensure that a floating interest rate won’t impact your ability to afford the monthly payments when rates go up.
  4. Take interest reserve into account. This reserve, which is added onto your loan total, is an estimated interest payment covering the construction period. It eliminates the need to make monthly payments while the project is being built, but because this reserve is added to the loan amount, you will pay interest on it. Decide whether you want the interest rate to be added, or if you want to make monthly interest payments instead.

If you don’t have perfect credit or a strong relationship with an existing lender, obtaining an affordable construction loan will be challenging, but if you only apply for what you can truly afford, approval is more likely to happen, especially in today’s booming housing market.

If you’ve got questions about construction law, we can help. Contact us today!