How to get a construction loan

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Construction loanOnce they’ve decided to build a home, many land owners first choose to find a lender. It’s an understandable choice. But you’ve got to be careful, because financing new construction is entirely different than simply getting a mortgage.

If you’re building a new home, you’re going to have to get both a construction loan. And you need a specific type of lender to get the right deal.

What to look for in a construction lender

It’s always safe to look for a banker that is experienced with construction loans. This type of lending has its own quirks, and you want a bank that understands it so that you can get the best deal. Don’t just walk into any mortgage company or bank and assume that you’re getting the best possible rate, or more importantly, they even know how to do a construction loan.

You’re also better off with a banker that has a relationship with a mortgage lender. With a construction loan, the banker will give you money for construction, and then the mortgage lender will pay that loan off at the end and work out a monthly payment for you. If the two have a working relationship, that transfer can happen seamlessly.

Lastly, it’s always very helpful to know a trustworthy builder beforehand, because it can impact what kind of a deal you’ll get, if you get one at all.

Approval of your construction loan can depend on your builder

A banker that deals in construction loans is in a tricky position. If they loan you money for home construction, they’re also on the hook if something goes wrong.

For example, let’s say that you choose a cost-plus builder and the cost of building your home goes way over-budget. Now that bank is between a rock and a hard place. They have to either loan you the money to finish the home or try to figure out what to do with an unfinished house.

Naturally, they’re going to be a bit picky about whom they lend to. A banker isn’t going to like the idea of lending you money if you’ve chosen a builder that has a reputation for going over budget or causing other problems.

On the other hand, if you’re working with a reputable builder, your odds of getting approved get much better.

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