Construction Loan - Requirements

Qualifying For A Construction Loan

The qualification process for a construction or renovation loan is different to that of a conventional, jumbo or FHA mortgage loan.
  • Among other information, the Lender be they a Bank or other Lender will want to check and verify the credentials of the Building Contractor if you will be working with one.So it is essential that you review the references and licensing of the contractor prior to deciding on one to use.
  • The Lender will need building plans, whether you are applying for a new construction loan or a loan to make improvements in your home, the Lender will want to see building plans. Also building plans will be required in order to pull building permits prior to commencing any construction work. Lenders will also ask for a copy of the building permit prior to closing.
  • The Lender will need an Appraisal. Most will want a value of the property "after completion", as they will use this to calculate how much financing they are willing to offer.
  • Down-payment. For Construction Loans the typical down-payment requirements are 10% of the appraisal value and if also financing the land purchase then 25% of land purchase. If you already own the land, the lender may use the value as the equity for the construction loan.

Process After Construction Loan is Funded

So you have now gone through the process of obtaining a construction loan and have the financing - what now?
  • The funds are disbursed by way of draws after completion of certain phases of completion.
  • The Lender will have a draw schedule, showing when each draw will be disbursed, commonly the Lender will disburse funds as each phase is completed such as demolition.
  • The funds will be disbursed only after inspection by a Lender appointed inspector to verify the required work for disbursement has been completed.
  • Interest payments will be required based on the actual amount of funds disbursed. Typically as the construction progresses the required interest payments increase as more money is disbursed.