[:en]Is a construction loan your ticket to building your dream home? Maybe you are second-guessing yourself because your credit history is not as pristine as others. Or maybe, you have filed for bankruptcy and you feel that it is impossible for you to get back up on your credit rating. Your financial history may not be creditworthy anymore but you can still get a construction loan even if you suffered financial difficulties in the past.
Construction loans can be challenging to apply even if you have a good credit standing, how much more if you tarnished your credit history. Lending companies tend to make it a bit harder to approve construction loans because there is still no house to use as collateral for the loan. Per experience, builders and lenders know that more often than not, the budget goes beyond the initial amount that is being estimated.
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Imagine if you are a lender and the house that the construction of the house that is being built is stopped in the middle of the project, how then will you dispose of that property? How can you recoup your investment when the borrower can’t make good of his construction loan?
That is the possible reality for people of good credit standing, now how much more if the borrower has a history of bad debts? But all is not lost. There is still hope for people who made wrong financial choices in the past and was not able to maintain a good credit standing.
Credit improvement
The most rational thing to do is to start cleaning up your act and improve your credit standing. The bills you expect to come monthly, make sure you pay them on time. If you have credit card bills that you need to settle, do not just pay the minimum. Regularly get a copy of your credit report and double-check if there are errors that you need to correct which may affect your credit score.
The bigger down payment the better
Do not just go for the smallest amount that you can come up with when it comes to down payments. If you can prove to the lender that you have been saving up money so that you can give a huge chunk for downpayment, chances are, they will look favorably upon you. If the requirement is to put down a 20% down payment on the loan you plan to take, then, if possible, go beyond that amount.
FINANCING ELIGIBILITY
Financing options: FHA, Conventional, USDA, and VA
FHA: 3.5% down-payment
Conventional 5% down-payment
USDA: Zero down-payment
VA: Zero down-payment
As with any other loan application, make sure that you shop around and prepare all the papers you need when you apply. Construction loans may be a bit more challenging to apply for given your circumstances, but it is not a dream that cannot be realized.
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You’ve acquired some land and are ready to build the home of your dreams. Yet if you’ve had a past bankruptcy or other credit blemish, you might find your house haunted by the specter of poor credit before you even break ground.
Construction loans can be tricky to obtain in the best of circumstances. Lenders see them as riskier than other home loans because there is no completed house to use as collateral. Also, construction plans often go over budget, schedule or awry in some way. While construction loans can be secured by the land being constructed upon, it is less attractive to lenders to take possession of land alone or a half-built house should the borrower default on the loan in the middle of construction.
Add a poor credit score into the mix and you have a risk recipe that many lenders are hesitant to make. You won’t be able to waltz into a construction loan easily if you have poor credit, but it is possible to obtain financing with some dedication and planning.
Boost your credit
The first and most obvious task is to work to improve your credit. Pay your bills on time and pay down as much outstanding debt as possible. Get a copy of your credit report and check for errors that may be weighing down your score, as well. There is no quick fix to improving your credit score, so begin as soon as possible.
Save up for a larger down payment
Start saving toward a down payment. When seeking any loan with poor credit, the larger the down payment you are able to extend, the more seriously a lender will take your proposal. Those with bad credit typically need to put down 20 percent of the loan to give a lender more confidence.
One-close vs. two-close
Construction loans can either be one-close or two-close loans. With a one-close loan, the financing for the construction converts to a home mortgage, where a two-close loan requires closing a separate construction loan and home mortgage. You have options with either route, even if you have poor credit.
FINANCING ELIGIBILITY
Financing options: FHA, Conventional, USDA, and VA
FHA: 3.5% down-payment
Conventional 5% down-payment
USDA: Zero down-payment
VA: Zero down-payment
Whichever loan type you seek, first prepare the construction plan documentation and compare lenders. Construction loans are a more niche product than standard mortgages and there are fewer on the market. .
