So often I am asked, “What are the requirements to qualify for a construction loan?”. The short answer is, there are literally hundreds and hundreds of guidelines for each agency, Conventional, FHA and VA. In addition to these agency requirements, each lender may have “overlays”, requirements over and above the agency requirements. It’s far easier to find out what a potential borrowers credentials are and then match them to the correct program.
That being said, let me give you some of the key qualifications for each agency’s programs.
FHA and VA Construction Loans Guidelines – These are the easiest programs to qualify for. You must have a minimum 640 middle credit score. If you have had a Chapter 7 bankruptcy you can not apply until you have been discharged for at least 2 years. A foreclosure means you have to wait 3 years. You monthly debt-to-income should not exceed 50% on an FHA Construction Loan. FHA requires a 3.5% down payment, VA is 0% down.
Conventional Construction Loan Guidelines – Conventional requirements are a little tougher. You will need a 680 to 720 credit score depending on your down payment. The waiting period after major credit issues is longer, 4 years after a bankruptcy, 7 after a foreclosure. Maximum debt-to-income is tighter, 43%. You will need a minimum down payment of 5% to 20% depending on the lender.
Jumbo Construction Loan Guidelines – Jumbo loans are loan amounts that exceed the county Fannie Mae/Freddie Mac maximum loan amounts, generally anything over $510,400. These are the toughest of all programs to qualify for. Each lender’s requirements will be different. Typically you are going to need a 720+ credit score, a debt to income not exceeding 43% and any type of major credit event (bankruptcy, foreclosure, short sale) will exclude you from approval. Minimum down payment is 10% but could be higher.
Other key factors –
*Self Employment – your income will be based on the net income you paid taxes on for the last 2 years.
*Unique Homes – if there are not at least 3 sales of a similar homes, in your area, in the last year, it is unlikely you will find any lender willing to lend you money to build your home.
*Excessive Land – if you are building on a parcel that is larger than what is customary in your area, the appraiser may not give you credit for all the land value.