How to Apply for a Construction Loan

Construction financing is often easy to obtain.

A construction loan is part of a home loan that is used to build a house. As the builder/contractor completes the home, the bank releases funds to pay the cost of construction. When the home is completed, the new home loan (known as an "end loan"), pays the construction loan and the borrower begins making monthly mortgage payments. Applying for a construction loan can be tricky, however, with the proper knowledge it can often be accomplished with minimal difficulties.

Things You'll Need

• Income documents for mortgage application
• Contract with builder/contractor

Instructions

1. Get pre-qualifed for an end loan. Gather your last two W-2s and pay stubs, bank account statements and other personal financial information requested by your lender., After you've completed an application, a loan officer will issue you a letter of pre-qualification for you to present to your builder.

2. Meet with a home builder to determine how much it will cost to build your home. This will allow your bank to determine the size of your construction loan. You will be given a builder's package that includes a breakdown of what each material used in construction will cost.

3. Review and sign a contract with your builder. Read the contract carefully to ensure you will not be penalized if you make changes to the construction process before the home is finished. Contact an attorney if you have questions.

4. Purchase construction insurance if your builder is not insured. This will be a lender requirement. Most lenders require a general liability, course of construction and Workers' Compensation policy (if builder has employees). Construction insurance can be purchased though most insurance companies. If your builder has insurance, make a copy of his insurance cards (see Resources).

5. Meet with your loan officer and complete an application for a construction loan. The process is the same as applying for an end loan. You will also be required to order a "subject to" real estate appraisal. Depending on your market, this type of appraisal will fall into the $250 to $500 range.

Tips & Warnings

• Only work with a loan officer or lender who is experienced in writing construction loans.

References

• 1st Step Mortgage, Inc.
• Bengoa Appraisal Services

Resources

• Construction Insurance