Whether it's your future home or a commercial project, looking at your construction project from the lender's viewpoint will help you understand how to get your construction loan approved. A lender cannot approve a project until a credible risk assessment has been made showing that your loan is unlikely to go into default.
Financing a Personal Residence
In most cases, you'll buy the vacant land first if you intend to build a house. Bank policies regarding vacant land vary, but in general banks don't love empty lots. You'll need to put more down in order to get your lot loan approved, but you need to do that first for a couple of reasons. It makes little sense to spend money developing a property you may not be able to acquire. The lender is also unlikely to approve a construction loan until the vacant property is secured. While in theory, you can get a single loan for both the lot and the development -- in this case, your personal residence -- in practice doing everything at once is unwieldy. Most experienced residential builders secure the land before beginning development. Be sure the land is zoned for your use before buying.
Once You've Acquired the Land
Your loan officer wants to see as much data as possible. Your credit record and credit score are both important -- the fewer the blemishes, the better. According to Bankrate, a FICO score of 660 or below is considered subprime. The lower your FICO credit score, the more difficult getting a loan will be and the higher the rate. Assuming you're creditworthy, the bank wants to know everything possible about your building plans. This means developing good architectural plans, and securing firm bids from a reputable contractor.
Before putting much money into the project, the bank will want to see that your plans have been approved by the city or county building authority. In larger cities, multiple approvals are necessary: one from the planning commission, another from the building department and perhaps a third from a neighborhood homeowner's association.
Commercial Construction Projects
Projects with a commercial purpose will get additional scrutiny from your lender, who will want to see data showing that your project is commercially viable. In additional to planning commission approval, commercial developments will generally need to show the zoning commission before lending. The lender will also want to see a pro forma -- a spreadsheet showing projected expenses and income once construction is completed.
In addition to the down payments on the land and on the construction project, be prepared to front a considerable portion of other fees associated with the project. Before your lender initiates the loan you will generally have paid some portion of an architectural fee and various government and regulatory fees, including planning and building department permits and zoning approval fees for commercial projects. In some circumstances, before you can get building plans approved you will also have to retain a structural engineer and a land surveyor. Most lenders require monthly interest only payments on whatever has been borrowed to that date. Some banks take the total estimated interest out of the loan when it is initiated and put it into an impounded reserve account the bank draws on monthly. Whether or not the bank sets up a separate reserve account, anticipate that during construction you will have to pay the interest charges as they accumulate.
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