By Sara Bos, Grand River Bank Mortgage Loan Officer NMLS 1766651
You need a strong foundation to build a home, and that starts with the appropriate financing and the right experts to help guide you through the construction process. Building your dream home is exciting but an overwhelming process. Educating our borrowers on the best option for their personal situation is a hallmark of Grand River Bank. You need to know how much of a home you can afford before you start working with a builder. I’ll break down construction financing so you can make an informed financial decision. Your strong foundation starts here:
How is your credit score?
Your FICO scores will play an important role in getting a good loan and a good rate. Your mortgage lender is most likely going to check all three of your FICO scores (one from each of the national credit bureaus; Equifax, Experian, TransUnion), so you should know those before applying for your loan. Most lenders will take your middle FICO score or if you have a co-borrower the lowest borrower’s middle score. If you find your score is lower than you were hoping, there are a few things you can do to raise your score. Make sure there are no mistakes on your credit reports and dispute any problems. Are there any balances you can pay off? This may help raise your score. Most importantly don’t take on any new debt or open new credit card accounts. To learn more about credit scoring and how to improve it, visit: https://www.myfico.com/credit-education/whats-in-your-credit-score.
Plan for a Large Down Payment
With construction financing, planning for a large down payment will be important. Many financial institutions prefer you put 20-25% of your purchase price down on a construction loan. This ensures you are invested in the project and also protects your lending institution. Your down payment might be able to come from a checking or savings account, investments, sale of a home or a gift.
How much house can I afford?
Every person has a unique situation. The financial institution will estimate how much house you personally can afford. A qualified mortgage requires your debt to income ratio be 43 percent or less. Most lenders generally feel that being able to afford a house means keeping your debt to income below 36 percent when counting all your monthly debt obligations, including credit cards, car loans, student loans, your housing expenses, etc. Mortgage lenders may be more or less strict, but it’s a fairly dependable guideline to figure out your borrowing limits.
Collect your financial documents
Your lender’s goal is to assess you financially as a borrower and ensure you can make your payments on time. As such, you’ll need to provide them with documents that paint an accurate picture of your creditworthiness and financial state. This part is not exciting but providing all the documentation you need quickly will help your loan process go smoothly. Depending on your situation, here are some documents you might need when applying for a construction loan:
- Tax returns
- Pay stubs
- Other proof of income (such as child support, 1099 forms, etc.)
- Bank statements and other assets (checking and savings account statements, investments, life insurance, etc.)
- Photo ID
- Mortgage statement or rental history
- Homeowners insurance agent (Name and phone number)
Understanding construction loan products
There are many different construction products to consider. Talk to a loan officer experienced in construction financing to help you figure out which product is right for you.
- Construction to Permanent Loans: Construction financing that offers a one-time closing, which funds the cost of home construction and then serves as your final mortgage when your home is complete.
- Construction Only: You could opt to take out two loans. One for construction costs and another for your mortgage. A potential advantage is you will get to shop for a mortgage lender while construction is being completed. A potential disadvantage with this two-time close loan is that you will pay closing costs a second time when you take out your final mortgage.
- Renovation Loans: If you are working with a fixer-upper, you could borrow against the expected value of your renovated home. There are also alternatives to this such as Home Equities or Cash Out Refinancing.
- Owner-Builder Construction: If you are the builder of your own house and have the certification to prove it, you could take out this type of loan. Not all lender’s offer this product.
- End Loan: With this type of loan, the builder takes on the costs of constructing your new home. When it is complete, you buy the finished home from the builder with a traditional mortgage.
Build your dream team!
Building your dream home will require a lot of team work. It’s best when a mortgage lender, realtor, and builder work closely together with you to get you into your home. Do your research and talk to trusted experts.
- Find a lender experienced in construction financing and is easy to work with. You also want to look for a financial institution that has the construction products that will fit your needs.
- It is important you hire a real estate agent to represent you in this process. Purchasing new construction can be more complicated and intimidating than buying a resale home. Your agent should be a local expert and have experience with newly constructed homes.
- Research builders and visit homes your builder has built recently or visit the HBA Parade of Homes.
As a premier residential lender, Grand River Bank would love to help guide you into the home of your dreams and ease you through the construction financing process. Contact us today!
For educational purposes only. Please contact your qualified professional for specific guidance. All information is deemed reliable but not guaranteed.
About the Author
Sara Bos, Mortgage Loan Officer
As a lifelong resident of West Michigan, I believe in the strength of community, meaningful relationship and hard work. Those beliefs are reflected throughout my 17-year career as a community banker. Experienced in marketing, community relations, customer service and mortgage lending, my passion is people – connecting, communicating and above all, making a difference to those who depend upon me. I enjoy guiding my customers through their home-buying or construction journey and I’m proud to create seamless, creative and stress-free mortgage solutions that work best for them. I am proud to be a member of the experienced and relationship-driven Grand River Bank team!