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 620 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 for an FHA loan, 2 years for a VA. The published guideline for debt-to-income 43% but higher rates can be approved if you have compensating factors. 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. The waiting period after major credit issues is longer, 4 years after a bankruptcy, 7 years after a foreclosure. The stated debt-to-income is the same, 43% but again, higher rates can be approved with compensating factors. You will need a minimum down payment of 10%.
High Balance Construction Loan Guidelines – In 2021 the standard Fannie/Freddie max loan amount is $548,250. In some “high cost” areas the max loan amount is higher. Call me for the latest numbers.
Oher key factors –
*Self Employment – your income will be mostly based on the net income you claimed on your taxes for the last 2 years. Non-cash expenses such as depreciation and depletion can be added back to your income. Keep in mind that about half of the per mile auto expense is for depreciation.
*Unique Homes – the home you plan to build must be common for the area. 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. The smaller you down payment the more you have to watch this.
*Excessive Land – if you are building on a parcel that is larger than what is customary in your area, the appraiser may not be able to give you credit for all the land value. Again, look at the sale comps. How much land are they built on?