If you're planning on buying land and building your dream home, you'll need to prepare yourself for securing a construction loan to pay for the building process. These loans are typically more difficult to obtain than traditional mortgages because the lender is putting up money for an investment that doesn't exist yet. To increase your chances of prequalifying for a home construction loan, it's important to make yourself look as financially sound as possible.
Credit Score
Check your credit reports and scores from all three of the major credit bureaus to ensure there are no inaccuracies or problems. Having good credit is very important in obtaining a home construction loan, so if you want to prequalify, both you and your spouse need to ensure your scores are as high as possible. If your score needs a little help, take steps to pay off your debts and increase your available credit. Paying your bills on time every month is also very important.
Debt-to-Income Ratio
To prequalify borrowers for a home construction loan, lenders typically want to see a low debt-to-income ratio. Pay off debts and pare down spending as much as possible prior to going through the prequalification process to increase your cash reserves and improve your overall financial picture. Your goal should be to have debts that account for less than 45 percent of your total monthly income.
Cash Reserves
Having enough cash to pay for at least six months of living expenses in your new home is a key factor for many lenders. Once you pay off debts, use the money you're saving each month to put aside for your new home project.
Downpayment
Lenders will also require a downpayment of at least 20 percent for a home loan, so you'll need to save for that as well. The downpayment reduces some of the risk for the lender, as it ensures your commitment to the project and likely will prevent you from walking away from the project if things become challenging.
Project Cost
Although a full property appraisal isn't necessary until you formally apply for a loan, you will need to have a good idea of the project cost while prequalifying. Speak with your contractor to get a report of costs based on the type of house and the materials used. Knowing the estimated value of the home upon project completion is also important.
References
Writer Bio
Lynn Burbeck is a professional writer with over five years of experience writing for the Web. She has published numerous articles for print and online media including "Grit" Magazine. Burbeck holds a B.A. in journalism and political science.