step 4: Financing Your Home Construction

Find Financing

Step 4 is all about home construction financing.

We invite your to jump to our nationwide lending network
for information about home construction financing:

click here for our national home lending network

This center provides all the resource information you
need to select your construction financing product and
submit your application.

Getting Approved

Lenders use several criteria to qualify a home buyer for a home equity loan. The most important criteria include:

1. the home appraisal
2. your credit rating (more information about credit ratings)
3. qualifying debt-to-income ratio
4. your employment

The Home Appraisal:

• Lenders will not extend your requested financing amount unless they know the market value of your existing home.
  
  That is why many lenders complete some type of home appraisal before they qualify any financing amount.
  
  Most lenders qualify loan amounts at 80% LTV or lower,
  which means that they will underwrite a loan that is 80% of the appraised or market value of the home minus your current mortgage loan balance (includes any second and third mortgages).
  
  Many lenders now qualify applicants at 100%LTV or higher — which means they will lend you the full equity value of your home minus any mortgage loan balances.
  
  we have an LTV calculator that estimates your equity position
  
  We have additional information about home appraisals:
  view our Home Market Valuation

Qualifying Debt-to-Income Ratio

• Your capacity to repay your loan is an important factor that lenders consider when qualifying an applicant for financing.
  
  If the capacity ratios are too high, you will need to change one of the following parameters in order to qualify:
  
  
  • reduce your borrowed amount
  • borrow at a lower LTV
  • increase your income
  • pay off outstanding debts
    
    
    

Debt-to-Income Ratio:

The "debt-to-income ratio" is the most commonly used ratio for qualifying an applicant.

It is calculated by dividing your fixed monthly expenses by your gross monthly income. As a basic rule, the debt ratio should not exceed 36%.

What are your fixed monthly expenses:

• monthly housing expenses (loan payments, taxes, insurance)
• estimated monthly payment for you home remodeling financing
• other monthly installment loan payments
• monthly revolving credit line payments such as your credit cards
• real estate loan payments on non-income producing property
• alimony and child support payments
• any tax or legal assessments.
  

Debt-to-Income Ratio Calculator
Input the following numbers to calculate your income-debt ratio:

=
Estimated Total Housing Expense: mortgage loan payment on your home including interest and principal real estate taxes hazardous insurance private Mortgage Insurance, if any other mortgage related insurance homeowner's association dues ground keeping fees property leases other special assessments and financing
Enter the estimated monthly payment for your home equity financing or enter your financing parameters below: Home equity loan amount: Number of months to repay: Home equity loan rate (APR): Click here for a blended sample of home equity rates %
Est. Total Monthly Installment Loan Payments:
Est. Total Monthly Revolving Credit Line Payments:
Est. Monthly R. Estate Non-Income Loan Payments:
Est. Monthly Alimony and Child Support Payments:
Est. Monthly Tax and Legal Assessments:
Est. Monthly Other Payments:
Total Monthly Income: employment income overtime bonuses and commissions net self employment income alimony, child support and income from public assistance social security, retirement, and VA benefits workman's compensation or permanent disability payments interest and dividend income income from trust, partnerships, etc. net rental income
Debt-to-Income Ratio (should be less than 36%):	%

Your Employment:

• Your capacity to repay the home equity loan is contingent on your employment and the income it produces.
  
  Lenders like to see loan applicants in steady jobs with verifiable income.
  
  Lenders will likely call your employer to verify your employment position and salary/wages.
  
  Any discrepancy in your reported employment and income may raise additional questions that can disqualify you for financing.
  
  
  
• Self-employed individuals will require additional documents to ensure lenders that the applicant has steady income
  
  These documents will include your personal tax filings and other information as required.

What is a Home Construction Loan

• You will need to qualify for a construction loan before meeting with a builder. The construction loan will have a set limit that you can borrow (based on your qualifying ratios: see Step 5), which will determine the expense of your construction project in addition to the up front money that you will invest in the construction.
  
  There are basically two types of loans involved when financing your home construction:

1. Home Construction Line of Credit:
   
   This is a credit line that the lender setups on your behalf for the payment of contractors and supplies during the construction phase of your home.
   
   Cash disbursements may vary by lender. Typically, the first disbursement buys the land and then successive disbursements will be made when certain phases in the construction project have been completed.
   
   Most lines have a term of about 12-18 months, depending on the size of construction and area. Some lenders will offer an extension if needed, but often with up front penalties.
   
   You will pay interest on the amount that you borrow from the line during the construction phrase. The interest rate on construction lines are slightly higher than residential mortgage rates.
   
   
   
2. Construction Loan (Residential Mortgage):
   
   At the end of the construction phrase, the line closes and the amount borrowed is paid off with a mortgage loan of your choice.
   
   Many lenders offer the combined construction line and permanent loan as a bundled product. There are advantages and disadvantages.
   
   If you are unable to obtain the combined construction/perm loan with the same lender, you will need to:
   
   
   1. first qualify for long-term financing (i.e., mortgage loan) with one lender and then,
      
      
   2. meet with a second lender for the construction line of credit — these lenders will typically extend credit once you have the permanent loan arranged.