Construction loans are different from traditional home buying loans. When you are getting a construction loan you are applying for a loan on something that does not exist and will not for many months. Therefore there is much more inherent risk for the bank. More risk for a bank turns into additional requirements for the borrower. So, how do you apply and receive a custom home loan?
The first step often comes down to preference. When building a custom home, the best approach is to partner with people that you trust. Architects and builders often have relationships with each other and can refer you to one or the other. As a result we recommend connecting with one of the two, first, to begin the process. While ultimately, the plans come before the build, if you know a builder that you would like to use then they can guide you through the whole process.
Before qualifying for a loan, the bank will require some information about the home you are building. This will give them an idea of what it will cost and if they can carry the loan. Just as a home has to get appraised by the bank, a new construction will help the lender determine if the home will appraise once it is completed. Having general plans is often a requirement for this process.
Before you get too deep into the design process, you should consult with a specialist. Holding off on some of the detailed planning (the fun stuff) will help you maintain your expectations of the build. Getting into the color of countertops and the types of fixtures may be enticing but make sure you can get pre approved first.
Just as you do when you are buying a new home, it is important to set your budget. Custom homes can quickly go out of your budget when you begin adding special fixtures and finishes. While these are great ways to increase the value of your home, it is important to set a budget that will guide your decisions.
Once you have finished the above steps you will need to look for a specialist. Just as there are specialists for traditional home buying loans, a construction loan specialist will be able to guide you through the process of applying for your loan. There will be some additional requirements such as a higher credit score and a higher down payment. A specialist will be able to guide you through the process and ensure you have the proper documentation to be approved for the loan.
Once you have shown that you have proper funding and meet the requirements put forth by the specialist you will receive a pre approval. This pre approval give you the green light to begin the process with your builder. You can start to dig into the details with your builder and build the house of your dreams!