If you can’t find the right home, sometimes you just have to make it. Fortunately, there are construction loans that make building your own house more affordable and more convenient!
General Construction Loan Requirements for 2021
Although the specifics may change depending on the type of loan you secure and the total amount, these are the general requirements for securing your construction loan:
- Credit Scores: In most cases, you will need at least 2 qualifying FICO scores on all construction loan products. Your lending agent can work with you to access the right information and generate the appropriate reports. In most cases, the score requirements are not significant; usually about 680 to 720 minimum.
- Loan Amount: For these loans, you need to borrow at least $100,000 for the construction. Amounts less than this do not bring a significant value to the lender, but this minimum amount will generally cover almost all applications. (Applications for less than $100,000 on new construction on extremely rare.)
- Underwriting: Manual underwriting is not allowed for these loans, which, as far as the borrower is concerned, basically means you need a credit score. (Manual underwriting is often used when a borrower has no score.) Desktop Underwriter is used for FHA, but Loan Product Advisor (LPA) can be use for other products. This is a minor detail that is more of a concern for the lending agent than the borrower.
- Downpayment Assistance and Mortgage Credit: Downpayment-assistance programs make home purchases possible for many lenders, but, because of the nature of these loans, they are not allowed. Likewise, mortgage credit certificates are not allowed.
- Eligible Property Types: You can build a variety of property types with these construction loans. You can complete a site build for a single-family residence, or you can use it for a modular home. Manufactured housing is also allowed, but it must be for a multi-width; single-wides are not allowed.
- Ineligible Properties: Some properties are not allowed on these loans. Most notably, you cannot use these construction loans to build an attached property. Multi-unit properties are not allowed, and co-ops are ineligible as well. Condominium properties cannot be built with these construction loans.
- Construction Contract: Unfortunately for DIYers and builders, you cannot work on the construction yourself, even if the builder permits it. All of the work, including labor and materials, must be including in the builder contract and construction costs.
- Contract Type: Only fixed-price contracts are allowed; the contract cannot be a “cost-plus” system.
Required Downpayments, Credit, and Other Factors for Construction Loans
Because of the higher risk and increased potential for default, these loans generally require larger downpayments. However, the downpayments will vary by specific loan product.
For conventional loans, you will need at least a 700 credit score and you may need a downpayment upwards of 30%. But these requirements vary.
If you have a credit score of 720 or better, you will need a downpayment of 10% to 20% for a primary residence. If you will be building a second home, you will need a downpayment of 20% to 30%, depending on other factors.
However, if your score is between 700 and 720, you’ll need a downpayment of 20% or more for a primary residence and at least 30% for a second home.
For all conventional construction loans, you will need a debt-to-income ratio of 45% or less.
The loans are available in 15-year or 30-year terms, but this does not include construction time. No investment properties are allowed with these loans.
Overall, FHA loans vary widely by loan totals and credit scores, with various allowances of debt-to-income ratios just to make things interesting. Across all FHA construction loans, the minimum requirement is at least a 660 credit score and no more than 55% DTI. The lowest possible downpayment is 5%, although some situations require as much as 50%.
We’ll break it down by loan amount…
If you are using a construction loan of up to $356,362 and have a FICO score of 700 or better, you can get the loan with a 5% downpayment and a 55% DTI is allowed. However, if your FICO score is between 660 and 700, you need a DTI of 50% or lower.
FHA construction loans in the range of $356,363 to $548,250 have essentially the same requirements, except of your score is between 660 and 700 you’ll need a 10% downpayment.
For loans between $548,251 to $750,000, you need at least a 660 credit score, a 15% downpayment, and your DTI can be no larger than 50%.
Loans between $750,001 to $822,375 have even tighter requirements. In this case, all of the above apply, but you need a 20% downpayment.
VA construction loans are also available to eligible borrowers. Like FHA loans, the requirements change depending on how much you need to borrow.
If the loan is up to $548,250, you need at least a 660 FICO score and a 5% downpayment.
Once the loan goes between $548,251 to $750,000, the downpayment requirement is still 5% but you will need a credit score of at least 680.
VA construction loans, however, offer excellent amounts, up to $1.5 million. If the loan is between $750,001 to $1,500,000, you will need a 680 credit score and a 10% downpayment.
For all amounts, the maximum allowable DTI on a VA construction loan is 50%.
Loan-to-Value Requirements for Different Loan Totals
To start the process, a full pre-qualification is required. Work with your lending agent to complete this process. The lender will also have to complete the builder-acceptance process, which verifies the quality and experience of the construction company.
Amazing Loans for Your Brand New Home
If you are considering a construction loan for your next home, contact our staff right away. We’ll help you start the process, including loan pre-qualification and builder verification.
You can create the home of your dreams, and we can help make it a reality with high-quality construction loans!
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