Are you thinking about building your own home for the first time? Or did you recently invest in a property to which you would like to make significant changes? Sounds like you need a builder loan. But before you submit your application, be sure you know what to expect and what is expected of you.
Tip #1: Clean Up Your Credit
Credit plays a significant role in the process of applying for a builder loan. As a result, one of the best things individuals can do to ensure that they qualify is to pay off or pay down significant debt. You’ll also want to avoid taking on any additional loans prior to filing your construction application. A good place to start is by checking your credit score with all three major credit reporting bureaus and continuing to monitor your scores throughout the application process. This particular tip applies to those individuals who are looking to make changes to an existing property. Otherwise, if you’re starting from the ground up, you may want to start with tip #3.
Tip #2: Choose Your Bank Carefully
All banks aren’t created equal, and some banks don’t offer builder loans. Individuals who are interested in securing funding for an addition or change to their home fare a lot better by only applying to local lenders that are known for approving funding for construction projects. Pursuing lenders with no history of approving development funding will waste your time and resources.
Tip #3: Ask The Contractor To Carry The Loan
Builder loans have a reputation for being hard to come by, especially for individuals looking to build from the ground up. There is a good reason for this: banks don’t want to give money away without knowing exactly what it will be used for and guaranteeing that it will be paid back. As a result, individuals have a tougher time trying to obtain approval, primarily because the construction plans often lack the details necessary for approval. Contractors, on the other hand, have a higher success rate, because they know what the banks are looking for and they possess the requisite skills and experience that help ease the banks’ mind. Another bonus to this tip is that it serves as a motivation for contractors to complete the project to your specifications and on schedule.
Tip #4: Learn About The Payment Schedule
One of the biggest misconceptions about builder loans is that they are like regular mortgages. This is 100 percent false, however, because they are two separate things. Unlike mortgages, construction loans are typically repaid through a variable rate note, starting with interest-only payments throughout the building process. Once the construction is completed and the local government has issued a certificate of occupancy, then the entire remaining balance comes due in full.