Documents Required for Home Construction Loans
Tuesday, July 17, 2018
Construction loans are notoriously difficult for would-be homebuilders to obtain.
Even before the housing bubble burst back in 2006/2007, people interested in borrowing money to build their own homes were often turned away because of their project’s status as a “risky” investment. (That’s because, since the property doesn’t actually exist yet, if construction ends up going awry, then the lender has no collateral to collect to recoup their losses.)
But this certainly doesn’t mean it’s impossible to obtain this type of loan—especially if you’re pursuing loan opportunities through credit unions, like SAFE, which are more flexible with their terms and won’t saddle you with an exorbitantly high interest rate should the loan go through.
Let’s say you are interested in pursuing a construction loan. What documentation will most loan providers ask to see from you?
Personal Financial Documents
Lenders need to establish that you have a regular source of income, and a decent enough savings—both of these factors lend credibility to you as a borrower, and signal that you’re less likely to default on your loan.
Here are a few personal financial documents that lenders may ask for:
- An employment verification document from your boss
- Unless you’re self-employed, you’ll need to provide at least two years’ worth of W-2s
- Two years’ worth of tax returns, including your Form 1040 if you’re self-employed or pursue freelance work outside of your day job
- Paystubs from the past month
- Bank statements that demonstrate your ability to provide a down payment
When a lender chooses to finance a construction project, they’re not just interested in your financial credibility—they’re interested in the financial credibility of the builder, too, seeing as they’re the ones that are doing all of the actual heavy lifting.
In order to prove that your contractor is legitimate, and won’t lead the project to ruin, lenders are going to expect to see the following:
- A resume or portfolio demonstrating the builder’s successes with past home construction projects
- Professional references from past employers who engaged the builder’s services
- A copy of the builder’s professional license and insurance, the latter of which will cover any potential accidents that happen while on the job
Last, but certainly not least, are the plans and other documents that outline the specifics regarding your construction project.
After you’ve established your credibility and your builder’s dependability, your lender is going to want to see what kind of building they’re financing on your behalf. They’ll usually ask for the following:
- A thorough budget demonstrating how all of the borrowed funds will be allocated
- A comprehensive list of materials that you intend to use to build your home
- Blueprints or comprehensive construction plans that outline precisely what sort of structure you will be erecting
- A contract outlining construction expectations for the builder, to be signed by both the builder and the loan applicant
- Proof of ownership of the lot or piece of land on which you intend to build
Now, bear in mind, documentation requirements differ from lender to lender. Some may be more exacting and precise with their demands than others.
But, generally speaking, you should expect to hand over a majority of the documents listed here—so if you’re at all serious about pursuing a construction loan, you might want to get a head start and begin gathering all of these materials right now, so you can embark on your big homebuilding project as soon as humanly possible.
Ready to get started with SAFE? Explore our Construction-Permanent Loan, available with rates as low as 5% down.