The number of people applying for a construction loan is growing day by day. Not only that, but people with existing home loans are not putting for sale signs in their front yards. These stats are consistent nationwide, according to the National Association of Realtors. Homebuyers are considering alternatives like designing and building their family home rather than leaving the floor plan to someone else.  
If you’re in the market to get a construction loan, here’s where to start.   

The Search for a Construction Loan Lender 

“It all starts with your ability to be financed and what kind of budget you can establish from there,” says Dan Moralez, regional vice president for Northpointe Bank in Holland, Michigan. “You don’t want to be sold something by somebody, and then the next thing you find out is that you don’t qualify.” 
Still, you will find that not every banker or broker will provide construction loans.  
“Most mortgage people will go their whole career without ever doing one,” says Jerry Thomas, a mortgage loan officer in Farmington Hills, Michigan. “Another big group of (lenders) will do one and then swear they’ll never do another one again.” 
To enhance your search for a construction loan, get referrals from your community, family members, and friends. Homebuilders can give you the names of lenders with which they have done business. If not, you may find a list of preferred lenders from your local Better Business Bureau or building and development office.  

Securing the Right Land 

Finding the right place to build your home is not a decision to be taken lightly.  
“You don’t have to own the lot free and clear,” Moralez says. However, any equity you have in the land can be applied toward a down payment and closing costs. It’s possible to “lock in a piece of dirt” so new homeowners can build on it in a year or so. Unfortunately, Morales says, “the number of lenders who finance vacant land is significantly smaller than the number of lenders who will do a construction loan.”  

Pre-Qualifying for a Construction Loan 

It’s not easy to get approved for a construction loan. Experts Moralez and Thomas say it’s because the banks are taking extra risks while the home is built. Since there isn’t an existing building to secure the mortgage, banks take a higher risk.  
Down payments are typically around 20% of the total amount of the loan. FHA, VA, and U.S. Department of Agriculture mortgage programs all back construction loans. They have the authority to allow credit leniency, even with lower or zero down payments. 
“If you can put 20% down and you have a 720 credit score or better, you know you’re pretty much going to qualify for everybody’s program,” Thomas says. 

Building Your Home Your Way  

“More and more often, we’re saying no,” Moralez says. “Most lenders will not do a self-build project.” However, he claims there are few exceptions that go to borrowers with relevant trade knowledge and experience. 
Also, construction loans for a do-it-yourself project typically require higher credit scores and larger down payments. Terms and qualifications vary by lender.” 

Establish Your Budget 

Building costs can sometimes go over budget especially if there are unexpected events or situations that occur while building. There could be dangers no one could have foreseen. Mainly, a builder’s budget includes major features such as lighting fixtures, countertops, cabinets, flooring, and other upgrades. Some materials can overrun a budget and someone will have to make up the difference. Are you prepared for this? Do your research before establishing a budget.