Construction Loan Requirements

Loans have become so easy to get these days. Or is it that, it just appears to be? Well, I don't know about that, though the reality speaks for itself. The reality is that loans are being taken by people, on a burgeoning scale. Home loans and auto loans are the loans, I believe, which are applied for the most. Having mentioned home loans, there is a considerable chunk of construction loans that are being applied for these days. Not exactly an easy process, there are number of construction loan requirements which are supposed to be fulfilled by a loan applicant. If you are planning to apply for one, here is some information regarding the documents required for it.

Construction Loan Documentation Requirements

Taxing the Income
Akin to most real estate loans, or any other loan for that matter, there is a stringent documentation required for a construction loan as well. Those who have a regular income, with a paycheck with tax deductions and all, they are primarily required to give W2. Which is a US federal tax form, issued by the employers, that states how much did the employee earn in a year. The earnings stated should be from 2 to 3 years prior to the approximate date of application. It also includes minimum 6 consecutive paychecks, with all deductions and 3 years of tax returns and documents of any additional income you might have. Self employed borrowers would need to submit 3 years of schedule Cs (sole proprietors) or three years of S-corp or corporate returns. Further for confirming the cash flow, the borrower has to be prepared with banks statements for 2 years, to prove the cash flow.

Proving Property
A proof of land ownership is further required for getting a construction loan. Land title is one of the most common ways to prove the land ownership. In a few cases the lenders complete a loan mortgage which involves buying a parcel of land.

The Blue Print
Well, it is obvious with regards to construction loan requirements and the construction loan process that the borrowers have to get estimates from the contractors. Those who are giving you the money would definitely want to know the total amount. Moreover, they would also require a breakdown of the construction plan, as to what, when, how and so on. The plan should also include the approximate completion date.

Contractor's Cut
Again the lenders have an upper hand here. When they are lending a loan, they naturally want to make sure that the contractor is not a thug. Hence, financiers need a credit history and contractor's signature on the project write-up, along with a copy of the license of the contractor for operating in that specific state. This is a standard practice as far as construction loans are concerned, and contractors normally provide the requisite documentation requirements asked from them.

How to Get a Construction Loan

Step 1
Considering that you have got the correct bank or lending institution, the next step is to get it pre-approved and speaking to a loan officer in case of any doubts. Further getting it pre-approved will help you know how much you can afford. You might need to explain if your house would be owner occupied. And how long you plan to stay in, or you just want it for the purpose of investment. All these factors will have an impact on your financing options.

Step 2
You would also want to be sure about the fluctuating rate of interest, and if you want to lock your rate right there. It is important to know that the rate would not change once the construction loans is converted in a mortgage and post-construction.

Step 3
Just like the documents required for a construction loan are concrete, make a written contract with the builder/ contractor. The contract has to be crystal clear and unambiguous. It should also mention the possible contingencies and the amount quoted by the builder. If necessary get an insurance. Construction liability insurance is asked for by the banks, generally with regards to how do construction loans work.

Step 4
Finally, ensure that the construction loan requirements have been fulfilled and the loan is properly structured. In case of any skepticism or problems regarding clarity, it is always a good idea to speak to the financial adviser.

Okay, finally, if you are going to take a loan, give a thought to permanent construction option. These loans provide a period of interest-only payments. They then switch to the conventional repayment method where the borrower pays principal and interest payments during a period of 10, 15 or 30 years, till the loan is totally repaid.