The process of a new construction loan is rather simple to understand because in reality it only consists of 3 steps.

Step 1: Getting Prepared

The process for getting prepared for a loan of this type consists of the following things:

  • Checking your credit score
  • Improving your credit score
  • Saving money – the ideal method of this is to create a savings account and deposit a third of your income just as if you were making payments on a mortgage. The purpose of this is to have the cash on hand for the down payment of the loan. This down payment will need to be at least 20 percent to 30 percent of what the completed construction – including the land – will be.
  • Pay off credit cards
  • Make sure that all of your bills are paid on time
  • If you have any debt, try to get rid of it. This includes furniture payments, medical bills, car loans and credit cards.

Step 2: Getting Pre-Qualification

You can be pre-qualified for this type of loan by any home builder, realtor or loan officer. All that you need to do is ask. This is a process that will involve making calculations of your income after any other loans that you owe on have been subtracted. They will find what 35 percent of that amount is and this will represent an approximation of what you can afford to spend on a mortgage payment which will then tell you the amount that you can afford to borrow.

Remember to always be honest with whoever is pre-qualifying you. Also know that a lender will not lend you the entire 30 percent of your income but they will generally allow for an amount less than that. It is then up to you as to how long you want to make these payments; 15 years or all the way up to 30 years.

Step 3: Loan Application

The home builder will be a very important person in this process because he will be the one who is tasked with presenting documentation including house plans, a list of necessary materials and other documents. Since he will need to visit the bank with you, ask him to accompany you for the loan application process. This person can also be of assistance to you when you are filling out various forms regarding the loan.

Remember to always be honest when it comes to these forms. Double check your records to ensure that they are accurate and that all of your numbers match. If they do not, you will be denied.

Now you just have wait for the response to your application. This may take many weeks depending on the lender. While this process can be one that is rather complicated, if you make sure that you are prepared and that you are up front and honest with both your home builder and your loan officer and that all of the info on your application matches the info on your tax returns then you will have a better chance of getting your loan approved.