What Credit Score is Needed for a Construction Loan?

One of the financing options you have when building a new home or remodeling is called a construction loan. For many who are just starting to look into the financing aspect of their project, questions about eligibility can arise.

One of the main questions people have is what type of credit score is needed if they want to get a construction loan. Credit scores are a factor but there are also other things a lender will consider (see below).

But first, what is a construction loan?

Here is what Forbes.com has to say about construction loans:

What Is a Construction Loan?

“A construction loan is short-term financing that can be used to cover the costs associated with building a house from start to finish. Construction loans may cover the costs of buying land, drafting plans, taking out permits and paying for labor and materials. You also can use a construction loan to access contingency reserves—if your project is more expensive than you planned—or interest reserves, for those who don’t want to make interest payments during construction.”

How Construction Loans Work

“Construction loans let future homeowners borrow money to purchase materials and pay for labor necessary to build a home. Often, this money also can be used to purchase the land you’re building on; however, if you already own the land, you may be able to use the property as collateral for your loan. Because construction loans generally are intended to cover the building process, they’re typically issued for a period of 12 to 18 months. That said, some loans automatically convert into a permanent mortgage once construction is complete.”

Construction Loan Requirements

“Before you can get the financing necessary to start your construction project, you’ll need to get approved for a loan. This process is typically more rigorous than for mortgages and other loans because the loan won’t be secured—or collateralized—by a home. In addition to imposing traditional borrower standards, lenders also will need to review and approve architectural plans, an estimated construction timeline and a proposed budget.

To win approval for a construction loan, you may need:

• Good to excellent credit. To reduce their risk, lenders require borrowers to have a credit score of 680 or higher to qualify for a construction loan. That’s just the minimum, as some lenders may require a score of 720 or better. If you’re planning to build a house, consider taking some time to improve your credit score before applying for a construction loan.
• Enough income to pay off the loan. In addition to having a strong credit history, you should have enough income to cover payments on your current debts and the new construction loan. To confirm this, your lender will ask for financial statements or other documentation demonstrating your annual income.
• A low debt-to-income ratio. A borrower’s debt-to-income (DTI) ratio is a comparison of all of your monthly debt payments to your gross monthly income. The lower your DTI, the more cash you theoretically have to make construction loan payments each month. To increase the likelihood that borrowers will be able to make payments, lenders typically require a DTI ratio of no higher than 45% when issuing construction loans.”

Read the rest of the article and additional approval requirements from Forbes.com here.

Getting Help with Your New Construction Project from Financing to Project Completion

At Experts In Your Home, we have been in the construction and Remodeling business since 1948. Our team of licensed contractors can manage your entire new construction or remodeling project from initial discussion to final completion. We provide construction and remodeling services in Chico and Paradise, Ca. Additionally, we partner with a construction loan financing provider you can learn more about here. Contact us online or give us a call today!