How to Get a Construction Mortgage

When you are ready to build your dream home, you will most likely need a loan to purchase the land, hire the contractors and complete the house. You don't need a degree to navigate the home construction loan process. Simply follow these easy steps to gather everything you need.

Instructions

1. Contact several banks ask to speak with a construction loan department or construction loan officer.

2. Call loan brokers and request a construction home loan rate quote.

3. Pick up the phone and call general contractors for names of loan officers or banks that are construction-friendly.

4. Start with a pre-qualification from the lender(s) you have found. This will help you determine the budget you'll have for the project and your projected monthly payment.

5. Shop rates as soon as you're ready. Look for loans with a one-time close (rather than closing on one loan for construction and a separate loan upon completion) and the lowest rate.

6. Prepare for the loan application process. You'll need to compile a list of documents to present to the loan officer during the application interview. These may include:

   - Income and asset documentation for the past 2 years.
   - Income tax returns, W-2s, check stubs, employers names and contact information, profit and loss statements and business income tax returns if self-employed.
   - Social security, pension, investment and rental income, child support, alimony, bonus and overtime pay data.
   - Account names, addresses, values and account numbers for all bank accounts, mutual funds, retirement accounts, stocks, bonds, investments, life insurance, cars, trucks and recreation vehicles.
   - Debt documentation for the past 2 years.
   - Mortgages, leases, loans and credit card statements and cancelled checks.
   - Legal judgments that require you to make payments of any sort.
   - Building plans, land survey, house specifications and a market analysis of no less than 3 houses in the area that are in line with your future home.
   - Information, including references and experience of your general contractor. It is his/her professionalism that will be responsible for staying within budget and hiring subcontractors that provide quality workmanship.

7. Understand your income to debt ratio. This figure is the percentage of your income that is used to pay debts, including your new loan. Banks usually don't like to lend to anyone with an income to debt ratio above 45%.

8. Make an appointment with a loan officer or complete the application online.

9. Arrive on time to the appointment and be prepared with your paperwork.

Tips & Warnings

• Avoid loans that require a higher interest rate for initial locked rates.

• Stay away from ARMs that have a wide spread (more than 5 points) between high and low rate caps or unmanageable payment caps.

• Avoid and report "bait and switch" offers. A "bait and switch" is when an advertisement or a loan officer promises one rate or term then switches at the last minute to a higher rate or less favorable terms. Call the banking licensing board if you have been a victim of a "bait and switch."