How to Get a Construction Loan

Summary: Construction Loans including Owner Builder Construction Loans are difficult to obtain.

Hi Carl, if you don't mind, would you explain how an aspiring self General Contractor convinces potential mortgage lenders to risk funding them? Perhaps it's the location (a rural NC area,) the economy, market, or a combination of the both, but I cannot persuade any local banks to see their way clear to give a construction loan.

I'm caught in this Catch 22 where they're telling me that unless I am already an experienced General Contractor or at least a tradesman in the building profession, forget-about-it!

Are you aware of any National lenders who offer construction loans and would permit folks like myself to be the General Contractor? Anything you might provide I would surely appreciate. Dennis P.

Hi Dennis,

For those of you who have been looking for construction financing, you have obviously found the going to be tough.

On my blog, are two Direct Portfolio Lenders specializing in residential and commercial construction lending. These types of lenders are also called Private Money Lenders, Private Investor Lenders, Portfolio Lenders, Hard Money Lenders, Private Lenders, etc. These types of lenders often offer Self Build Construction Loans and allow you to act as your own general contractor. The cost of construction loans from these lenders is often higher than the cost of loans from banks or credit unions but, these lenders are usually more willing to grant construction loans than banks or credit unions. I have used these alternate sources of construction financing with favorable results.

Any additional cost of your loan should be more than offset by the amount of money you should be able to save by being your own General Contractor. Estimate the cost to build your house carefully before making any lending decisions.

Owner Builder Construction Loans as well as all new home construction loans are difficult to obtain because construction mortgage lenders fear you won't finish your new home or major remodeling project and if you do, it will be way over your estimated cost to build...because you or your builder don't have enough experience or track record that proves otherwise.

In my book, "Be Your Own House Contractor" I say that the hardest part of building my 1st house was getting the construction financing. I was humiliated, laughed at, and called crazy by LENDERS!

Back then, as now, you had to have excellent credit, 25% of the total cost as a down payment (no sweat equity allowed), a very detailed estimate of the cost to build, and the loan could not exceed 75% of the total project cost or (subject to completion) appraised value when finished.

I persevered and finally convinced a local banker that I was capable, had 25% down, credit worthy and bound and determined to see the job through to its end...the only thing missing was the money.

So Dennis, go back to the bank that indicated they would make you a construction loan if you were at least a tradesman in the building profession.

Show them you can do your homework and prepare a very detailed estimate of the cost to build your new home.

Have the major subcontractors and suppliers lined up with their names and phone numbers, and have written bids and estimates from them as well. (Having that level of preparedness was how I finally got an owner builder construction loan).

And, plan on a down payment of at least 25% of the total project cost (land plus construction costs).

The more money you put down towards getting a mortgage loan or a construction loan, the less risk you are to any mortgage lender and the more apt you are in getting a loan approval.

If you already own the land and it is worth at least 25% of the total project cost you may be able to use that land as your down payment, if you paid cash for it or have owned it for over a year. Most lenders will require a separate land appraisal before deciding to allow using the land as a down payment.

The location or the design of your new home or remodeling project could be an issue, but your construction lender using your blueprints and the location oh your building project, will order a subject to completion appraisal from a competent real estate appraiser. This appraisal will assure both the lender and you of the (completed) value of the proposed new home or remodeling project.

Another approach you might want to consider is hiring an experienced General Contractor as a site supervisor or construction manager.

This would make your project much more attractive to a construction lender.

Read my articles on site supervisors and construction managers and you will see that the cost to hire an experienced general contractor as either a site supervisor or construction manager is reasonable.

You'll still save money, still be in charge, and have the advantage of having an experienced person to help you make decisions and more importantly, have a good chance at getting your construction loan...and have your own track record for the next house.

Other considerations:

Credit Unions are often more receptive than banks to the concept of an owner acting as their own General Contractor.

Custom home builders usually have their experience, financial strength, and track records established with one or more construction lenders. If you are going to have a home builder build or remodel your new home, be sure that factor is considered when deciding on which builder to use.

Good luck, Carl Heldmann