• Preston Morris

What Do I Need To Qualify For a Construction Loan ?


What's needed for a construction loan?

To win approval for a construction loan, you may need: Good to excellent credit. To reduce their risk, lenders require borrowers to have a credit score of 680 or higher to qualify for a construction loan. That's just the minimum, as some lenders may require a score of 720 or better.


How much down payment do you need for a construction loan?

A construction to permanent mortgage requires 20% of the sales price as down payment or 20% equity in the transaction. Keep in mind: Sales price is calculated based on the cost of the land/lot plus the cost of construction.


Construction Loan Requirements

Before you can get the financing necessary to start your construction project, you’ll need to get approved for a loan. This process is typically more rigorous than for mortgages and other loans because the loan won’t be secured—or collateralized—by a home. In addition to imposing traditional borrower standards, lenders also will need to review and approve architectural plans, an estimated construction timeline and a proposed budget.

To win approval for a construction loan, you may need:

  • Good to excellent credit. To reduce their risk, lenders require borrowers to have a credit score of 680 or higher to qualify for a construction loan. That’s just the minimum, as some lenders may require a score of 720 or better. If you’re planning to build a house, consider taking some time to improve your credit score before applying for a construction loan.

  • Enough income to pay off the loan. In addition to having a strong credit history, you should have enough income to cover payments on your current debts and the new construction loan. To confirm this, your lender will ask for financial statements or other documentation demonstrating your annual income.

  • A low debt-to-income ratio. A borrower’s debt-to-income (DTI) ratio is a comparison of all of your monthly debt payments to your gross monthly income. The lower your DTI, the more cash you theoretically have to make construction loan payments each month. To increase the likelihood that borrowers will be able to make payments, lenders typically require a DTI ratio of no higher than 45% when issuing construction loans.

  • A down payment of at least 20%. Borrowers usually are required to make a down payment of at least 20% when taking out a construction loan. However, many lenders require more—between 25% and 30% of the total construction costs. The requirement varies by lender, but if you make a down payment of less than 20% you may have to pay private mortgage insurance.

  • Project and construction budget approval. Because of the uncertainties involved in building a house, lenders want to see as much detail about the proposed project as possible. Improve your chances of approval by providing documents like a deed (or purchase offer) for the land, complete blueprints and specifications, a detailed line item budget in the bank’s preferred format, a payment (draw) schedule, and a signed construction contract with change order provisions.

  • Builder or general contractor approval. Likewise, you’ll need to demonstrate to the lender that your architect and builder are qualified, licensed and insured. This may involve providing copies of the builder’s insurance certificates, resume and proof of financial stability. You also should include a description of each party’s responsibilities, including for the architect, general contractor and anyone else involved in the project.


Types of Construction Loans

There are four main types of construction loans available on the market. Let’s take a look at them:

  • Construction-to-permanent loans – These loans provide funds to build your dwelling and for your permanent mortgage as well. This can only be acquired through banks and other traditional financial institutions.

  • Construction-only loans – This option provides the funds to complete the building of a property.

  • Renovation loans – This loan is for upgrading an existing home, rather than building one.

  • Owner-builder construction loans – These are construction or construction-only loans where you as the borrower also act as the home builder. This is typically only allowed if you’re a licensed builder by trade.


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