Whether you are taking a loan out for a home or business project, there are a few things you should be aware of before pursuing a loan.
A construction loan is financing specific for a construction project. Whether you are taking a loan out for a home or business project, there are a few things you should be aware of before pursuing a loan.
Here’s how to know when it is time for a construction loan and how to get one.
What is a construction loan?
A construction loan can be used for new construction or for modifying existing structures. Construction loans are traditionally not granted for real estate investments. Since construction loans (and the construction loan process) differ significantly from traditional loans, the bank will look at multiple qualifying factors. Further, obtaining approval for a construction loan can take significantly longer than it does for a traditional loan.
How do I choose a lender?
Since the construction loan application process can be lengthy and complicated, it is important to choose a lender that is experienced. When you choose an experienced lender, it ensures that the process will go more smoothly, and there are fewer complications.
It is also important that the lender is communicative and easy to reach, since you will be working with them for the duration of the loan. Here are some important questions you should ask a prospective loan officer before committing to working with them:
- Do you use a voucher or draw disbursement system?
- How long has your bank offered construction loans?
- How long have you worked as a construction loan officer?
Finally, when choosing a lender, shop around before settling on one lender. Even if you like the first lender you meet with, it is important to meet others and learn what rates other banks are offering. You can always go back to the first lender you met with, but you can’t go back and find a better deal if you commit to one too soon.
How Do I Apply for My Loan?
Once you have chosen a lender, it is time to fill out the application and submit it. The lender will review your application and other financial documents, which could include your credit score, tax returns, debt-to-income ratio and existing real estate holdings. The lender might ask for additional paperwork, such as your business plan.
Construction loans are especially risky for banks, so it is important to submit the correct paperwork and ensure your affairs are in order when applying. This increases your chances of being approved.
Though applying for a construction loan can be a lengthy process, it does not have to cause undue stress. Before applying for your loan, shop around for the best lender for your needs and ensure your financial ducks are in a row. With this strategy, you will be able to pinpoint the best loan for your needs and start building the construction project of your dreams.
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