How to Get a Contractor Loan

You'll probably have to finance the construction of your new home.

Building a home is expensive. Unless you have a lot of extra money, you'll have to finance the process. One way to do this is to take out a contractor, or construction, loan from a bank or lender. This loan will finance the cost of building your new residence. It will also keep your contractor on your job; as part of the loan, the contractor will receive regular payments, or draws, to allow for the purchase of materials and payment of crew members. Once construction is complete, you'll be able to convert your construction loan into a permanent mortgage, such as a 30-year or 15-year fixed-rate home loan.

Things You'll Need

• Copies of your savings and checking account statements
• Copy of your most recent federal income tax return
• Copies of your two most recent paychecks
• Copies of your credit-card bills
• Copies of your other loan statements, such as student, car or personal

Instructions

1. Make copies of the financial documents you'll use to verify your gross monthly income and monthly debt obligations. These papers include your most recent federal income tax return, last two paychecks, credit-card bills, savings and checking account statements and other loan statements. Your lender will analyze these to make sure that your required monthly debt payments, including your estimated contractor loan payments, are less than 36 percent of your gross monthly income.

2. Shop around for the mortgage lender or bank that makes you feel the most comfortable. Once you select this lender, explain to a mortgage loan officer that you are building a new home, and that you'd like to take out a construction, or contractor, loan.

3. Answer the basic questions that your loan officer will ask. You'll need to provide an address or location for your new home, your best estimate of your gross monthly income and your Social Security Number.

4. Allow your lender to run your credit. Your lender will want to know your three-digit credit, or FICO, score. This score instantly tells mortgage professionals if you're a trustworthy borrower, or if you're one who is more likely to default on your loan. In general, lenders look for FICO scores of 620 or higher. If your score is 720 or higher, you'll usually qualify for the lowest interest rates.

5. Send by mail, fax or e-mail the copies you made in Step 1. Your lender will review these papers, and your FICO score, to determine if you are likely to pay back your contractor loan.

6. Set a closing date if your lender approves your request for a contractor loan. On this date, you'll sign the paperwork--lots of it--that makes your construction loan official. You'll also pay any origination and closing fees.

References

• Bankrate.com: Construction Loan Information
• CNNMoney: Build Your Dream Home