Qualifying for a construction loan

When you get a loan to build a home, the lender doesn’t have a complete home as collateral during construction, so qualifying for a loan can be more onerous. The lender will want details about the home’s size, the materials used and the contractors and subcontractors that do the work. The general contractor can pull all this information together.

On top of that, the lender needs to know that you can make your monthly loan payments during construction. If the lender thinks you can’t make your current rent or mortgage payments while your next house is being built, you won’t qualify.

If you’re confident you can qualify, use Bankrate’s mortgage-comparison tool.

Have adequate savings

The lender will make sure you have savings to pay for unexpected costs. “There are always cost overruns when you are building a home that you may not know about until you are into it. We don’t want them to use every last dime they have before they start,” said Dennice Henshaw, formerly eastside division manager for Washington Federal.

Cost overruns happen when borrowers change their minds about what they want as construction proceeds.

Do your due diligence on the builder

An important aspect of building your home is choosing the right builder. Find one that has built the kind of house you want in terms of price, style and size. Look into the builder’s credentials with the local homebuilders association and ask for references from previous clients. You could also see if there are any complaints against the builder with the Better Business Bureau.

Typically, your lender will look into the builder’s credit standing, financial situation and licenses, as well as the track record for building similar homes before you get a mortgage.

Ongoing inspections

Lenders will conduct routine inspections as the home is built. During this period, the lender pays the builder in stages — called “draws” — and usually sends an appraiser or inspector to make sure that construction proceeds as planned.

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