HOW TO APPLY FOR A CONSTRUCTION LOAN

Applying for a Construction Permanent Loan isn't too much different than applying for a normal mortgage loan. HOWEVER, OBTAINING a mortgage loan does require a little more documentation than it used to.

Providing your lender with all of the proper information to obtain your mortgage financing up front,  prior to or at time of the formal application can make a huge difference in not only how fast your financing gets approved, but also the overall experience you have in the process.  

Fantastic view form the all seasons room by TimberLake Design / Build Construction

We all have very busy lives and we sometimes try to take a few shortcuts in order to get things moving, figuring we can catch with the rest later.  Unfortunately, that can make the mortgage process long, drawn out and unpleasant.  

By being prepared and providing everything your lender needs up front, you can eliminate any unnecessary surprises and the additional information requests that many people receive as result.  By providing everything up front, your loan officer can review your entire financial history and help you avoid any potholes along the way.  Preparing to apply for a loan today is must like getting ready for a test in school as your lender is testing your financial ability to repay the money they extend to you.

When the underwriters are reviewing your application, they are looking to verify the information via the supporting documentation your provide.  Let's walk thru the information required and why they need it.

Income - In order to validate the income you need to qualify for financing they need to get copies of the following documents;

1. Last 2 Years Personal Federal Income Tax Returns (all pages and schedules).
2. Last 2 Years Business Federal Income Tax Returns, if you own 25% or more in any business.
3. Last 2 Years W2's & K1's (the K1's tell the lender not only the income your received from the business, but your percentage of ownership and liability as well).
4. Your Last Years Retirement Income Documentation (Social Security/Pension Award Letters)
5. Documentation regarding any Alimony and Child Support Received, if you wish to use it to help qualify for financing.
6. Your last 30 Days Paycheck Stubs
7. A current lease for any rental properties your own.  Lenders prefer to see a 12 month lease which is current (not expired last year).

Assets - In this case they are looking to see what money you have on deposit and invested so they may validate that you have enough money for your down payment, closing costs and reserves for future payments (a buffer to show you can cover any temporary disruptions of income if they were to happen).  Your lender would need to get;

1. Last 2 Months "Official" Bank, Investment and Retirement Account Statements, all accounts, all pages.
   1. It is very important to provide the official statements.  Official Statements are what Banks used to mail their clients.  They can usually be downloaded form your banks website.  The reason is that they provide information on who owns the account, the bank where the funds are held and your account number.  Without them, your lender cannot determine who the account belongs to or where the funds are.
   2. If there are any non-payroll type deposits within your bank statements and the deposit amount exceeds 20% of your gross monthly income, you should provide a copy of the item(s) and an explanation of what they are, i.e. I sold my old car for $2,000.  You should try to provide documentation to support your explanation if possible.  This is unfortunately a regulatory requirement and it trips most people up when they do not provide these statements and documentation up front as the underwriter will come back prior to closing when you think everything is done and ask for it.  It is better to provide it to your loan officer up front.
2. If you are getting money from a relative, your lender will want to document it via what is termed a "Gift Letter".  This is a special form lenders use in which the donor certifies the funds are a gift and not a loan.  Loans typically cannot be used for down payments and if they are, the lender must calculate the repayment terms in your debt to income ratios to qualify you for financing.  Your lender can provide you with the standard form used.  Typically, unless you are obtaining a government loan (FHA or VA), all they need is the completed gift letter and a copy of a Bank Check from the donor to document you have the funds to close.

Property Information - Your lender needs to know everything about what you are trying to accomplish with the financing you seek.  For a Construction Permanent Loan, they need:

1. The fully ratified Lot or House (renovation loan) Contract, as applicable and a copy of any upfront deposit checks you have provided at time of the contract offer and any subsequent deposits you have or will provide so that you may be given credit for them at settlement.
2. The fully ratified Builder / Contractor Agreement (contract), along with a copy of any upfront deposits provided at time of execution so you may be provided credit for this as well.  Any deposits you provide are considered part of your down payment.  
   1. The contract should provide the date work shall commence and when it will be completed.
   2. Have specific inclusions and exclusions listed.
   3. Include the specifications for the house your are building, i.e. what type of flooring, siding, heating and air conditioning systems, etc...  Basically it should describe exactly what your beautiful new home will be made of and include in the way of amenities,
3. A complete set of house plans.  Architectural drawings are preferred, but most lenders will not need the structural plans or lighting diagrams, just a basic set of floor plans with dimensions and the exterior elevations (what the outside will look like when completed).

I should note, most lenders do not allow "Cost Plus Contracts" as the only thing they spell out is the fact the builder gets his/her profit regardless of what your new home costs. Since they have no accountability for cost control, it would put the bank's client at obvious risk and thus they are not considered by most lenders.

Personal Identification - In order to help prevent identity theft, lenders typically want to get a copy of a photo id so they know they are lending you, your money.  Typically they want at least one of the following;

1. Your Driver's License
2. A Passport
3. Visa information for non-residents

Other Items - You should inform your lender of the following as applicable:

1. If you rent, the contact information for your landlord.
2. If you are divorced, a copy of your separation agreement and divorce decree
3. If you have filed for protection for Bankruptcy in the past 7 years, a copy of your Bankruptcy filing and discharge, along with a brief explanation regarding why you had to file.  Your loan officer can guide you and help you put together an acceptable explanation letter.

By using the above informational guide as a template for what you need to prepare, you will be ready for the underwriter's test.  Of course a really good loan officer can help you with more exact details of what he / she will need to help expedite your approval, almost as if you had a copy of the test prior to the exam!