Getting a new home built can be an exciting process. You get to work with an architect and designer to create the perfect home for your needs. However financing the construction of a new home is different than getting a traditional mortgage. Construction loans have specific requirements and a unique process.
In this article, we’ll break down everything you need to know about construction loan requirements in Florida, from application to completion. Whether you’re building your dream home or an investment property, understanding construction lending will help set your project up for success.
Overview of Construction Loan Requirements
Construction loans allow you to finance the building of a new home on a vacant lot you own or are purchasing. The loan funds are disbursed in stages as construction progresses, unlike a traditional mortgage where you receive the full loan amount upfront.
Here are some key requirements and facts about construction lending
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Down payment – Most lenders require a 10-20% down payment on the total cost to build the home. This includes the price of the land.
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Credit score – You’ll need good to excellent credit with minimum scores around 620-680. The higher your score the better your loan terms will be.
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Debt-to-income ratio – Your total monthly debt payments, including the future mortgage payment, usually cannot exceed 43% of your gross monthly income.
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Loan-to-value ratio – The loan amount will be based on the appraised value of the home after construction. Loan-to-value ratios up to 80% are common.
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Construction plans – Detailed plans and specifications for the home will need to be submitted and approved.
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Builder requirements – Your general contractor will need to be approved by the lender based on experience, reputation, and financial strength.
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Permits – Proof that required building permits have been obtained will be necessary before funds are disbursed.
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Inspections – Periodic inspections of progress will be conducted before additional funds are released to the contractor.
The Construction Loan Process Step-By-Step
Now that you understand the basic requirements, let’s look at the step-by-step process to get a construction loan in Florida:
1. Find the Right Lender
Not all mortgage lenders offer construction loans, so finding one experienced with construction lending is key. Local banks and credit unions are a good place to start your search. Compare interest rates, fees, loan terms, and lending limits.
2. Submit a Loan Application
You’ll need to provide information about your income, assets, credit history, the building plans, and details about the contractor. Many lenders will want to see a land survey and appraisal of the property as well.
3. Get Pre-Approved
The lender will review your application and provide a pre-approval letter if you meet the loan requirements. This shows sellers and contractors you’re a serious buyer and can help secure better pricing.
4. Purchase Land
If you don’t already own the lot to build on, now is the time to finalize the land purchase. The lender will want to review the purchase agreement.
5. Finalize Building Plans
Work with your architect and contractor to finish the detailed building plans and specifications. The lender will need to review and approve these.
6. Obtain Permits
Your contractor will apply for all required local building permits for the project. Copies must be provided to the lender.
7. Loan Closing & Initial Draw
You’ll sign final loan documents and the first funds will be disbursed to start work – around 10-15% of the total loan amount.
8. Construction Begins
Once permits are obtained and the initial draw is received, the contractor can break ground and start constructing your new home!
9. Ongoing Inspections & Draws
As certain milestones are reached in the building process, inspections will be completed. If work passes inspection, additional loan funds will be released.
10. Final Inspections & Draw
When construction is complete, final inspections will be conducted. The final loan funds will be disbursed once passing inspections and occupancy requirements are met.
11. Loan Conversion
Once the home is finished, the construction loan converts into permanent financing that you pay back monthly, like a traditional mortgage.
Following this process with an experienced lender sets you up for construction loan success!
5 Tips for Meeting Construction Loan Requirements
Here are a few extra tips to help you meet key construction loan requirements:
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Start with an excellent credit score – Take time to improve your score before applying since this gets you the best loan terms. Pay down debts and correct any errors.
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Have flexible income/assets – Show you have enough reserves to make payments if the project goes over budget. Bonus points for non-retirement liquid assets.
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Select experienced contractors – A reputable builder with a proven track record will give the lender confidence. Provide referrals.
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Plan for contingencies – Build in a 10-20% cushion for unexpected costs into your construction budget/loan amount.
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Get help from your lender – Ask for guidance from your loan officer throughout the process to ensure you meet requirements.
Construction Loan Requirements: The Takeaway
While the construction loan process involves more steps compared to traditional financing, going in with full knowledge of what to expect will set you up for a smooth journey. Following the requirements and tips above will help your new home build unfold successfully from start to finish.
The key takeaways are:
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Construction loans allow you to finance new home construction on land you own or are purchasing
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Typical requirements include a 10-20% down payment, credit scores of 620+, a debt-to-income ratio below 43%, loan-to-value ratio up to 80%, detailed building plans, and an approved general contractor
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The loan is funded in stages as progress is made and inspected, converting to a traditional mortgage once construction is complete
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Working with an experienced construction lender provides guidance in meeting requirements and ensures your build goes smoothly
As you move forward with your new home project, remember to keep the lines of communication open with your construction loan officer. They are your partner throughout the building process. Meeting all requirements along the way means your dream home will soon become a reality!
Minimum Credit Score, DTI Limits and Other Restrictions
Our Florida new construction loan requires a 700 credit score conventional financing, and a 620 for FHA, VA, and USDA financing. For a manufactured home set up, the minimum score is 650. The maximum backend debt ratios is 45% for conventional, 56% for FHA. VA is based off of automated underwriting findings and can be as high as 70%. Your back end debt ratio max is the max percentage of allowable monthly debt, including your proposed home payment. Additionally the borrower will be required to have 2 months reserves in savings of what their total mortgage payment will be after closing.
If your credit score is below the requirements, feel free to reach out as we may be able to guide you in the right direction. This construction loan product is for primary residences only. Additionally the contract between you and your builder can not be cost plus, it must be fixed!
Do I Need to Own My Land First?
You do not need to have land already paid for to use our construction loan. It’s very possible to have your plans ready to go and your builder picked out as you shop for the land you want to build on. We can issue you a pre-approval letter to buy the land, from there we can get your loan through underwriting, order your appraisal, and then at closing the first draw of your construction loan would go towards the purchase of the land. However if you do own the land already, we can use the equity of your land to go towards the down payment and closing costs of your construction loan. Even if you have a loan on the land that you are still paying for we can use the equity of your land. The value of the land would be based on the appraised value if owned for more than 12 months. If you purchased the land within the last 12 months the value of your land would be based on the amount it was purchased for.
Your builder must be approved through our construction department. We look at experience, have they only built a home or two? It might be difficult for them to be approved unless we can show more experience under another general contractor. With our one time close construction loan the general contractor must licensed and insured. We will provide a builder registration form that can then be submitted along with accompanying docs for approval. You will use one general contractor to provide a contract for all the work including site prep.
We do not allow for owner builds, you must use a general contractor. Builder approval can be done as you work on your plans and shop for land to expedite the process! Although it does not take very long to get approval once we have the needed docs.
We go off of agency guidelines for down payment requirements. That’s means if FHA requires 3.5% down then what’s what we require. For VA financing there is no down payment required, and the same for USDA financing. For conventional financing the minimum down is 5%. This is an advantage over two time close construction products because they typically have a higher loan to value requirement for the construction loan.
First of all we will need a full loan application and to check credit, to get started get pre-approved. From there you need to choose a builder and we can submit them for approval. Then we need to have your blue prints, and the cost of materials breakdown. If you have land already you’re pretty much there because the builder can then give you a bid and then a contract for the build. If you don’t have land you would need to find a property and get it under contract, then a builder can provide a contract and correct bid based on any site prep needed on the particular lot you have found.
With a contract (no cost plus contracts), blueprints, and cost for materials breakdown we can then disclose the construction loan to you. After disclosures are signed we can order the appraisal and bring you through the underwriting process.
Construction Loan Requirements 2024 – HOW To Build Your OWN House!
FAQ
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