The first step in the construction loan process is getting pre-qualified, when the lender specifies the loan amount you can qualify for to build your home. At Schumacher Mortgage, our pre-qualification process takes a comprehensive look at your financial situation, which means once you’re pre-qualified, you can confidently move forward with your custom home construction plans.
During pre-qualification, you will be asked to provide employment history, financial information that ideally demonstrates good credit, a stable income, a low debt-to-income ratio, and availability of funds to meet the down payment.
In an initial phone consultation, your loan officer will explain the basics of a construction loan, including the financing options and credit evaluation. You also will complete the online application and provide the appropriate documents that your loan officer will specify. You should receive a prequalification letter within two business days, along with additional information about the next steps in the construction loan process.
But what if you don’t pre-qualify for a construction loan based on one or more factors? That doesn’t mean you have to give up on your custom home plans. You may just need to correct any problem areas as indicated by your loan officer.
The following are the most common reasons a borrower isn’t able to get pre-qualified and how to correct the deficiencies to prepare for reapplying later.
Credit Issues
As with any mortgage loan, lenders want to be sure that you are a reasonable business risk, which is why a “credit pull” review is an essential part of the pre-qualification analysis. A low credit score can be the result of several factors, including late credit card payments, the recent opening of multiple credit accounts, or an excessively high debt balance. You can improve your credit picture to help ensure a successful future pre-qualification by:
- Checking with credit card companies if you believe specific late payment notifications are incorrect.
- Making loan and credit card payments on time.
- Reducing the balance of your total outstanding debt, including revolving credit card accounts.
- Not applying for new credit cards.
- Avoid canceling unused credit accounts. Any debt that you’ve paid off on time is a positive sign on your overall credit score.
You should also avoid “quick fix” credit repair scams. If you feel additional support is necessary, it might be wise to contact a reputable credit counselor for advice.
Debt-to-Income Ratio
The debt-to-income ratio (DTI) is a critical part of a borrower’s full credit analysis. DTI compares your monthly debt payment to your monthly gross income. An exceptionally high ratio is a concern because it means you might have difficulty paying your monthly credit card bills, along with your construction loan debt. A lower ratio indicates that you are effective at managing your finances and better able to meet all financial obligations on time.
One “simple” solution to a high DTI is to pay down more of your recurring credit balances, thus reducing the ratio.
Of course, an increase in monthly income from a promotion or other source will also help reduce an overly high DTI, although you have less control over this.
Employment History
The ability to repay your loan largely depends on your monthly income, so stable employment history is a primary consideration for prequalification. An uneven employment record could be another reason for not qualifying.
A general guideline is that a borrower must be employed for at least two years, although not necessarily with the same employer. Supplying a pay stub showing year-to-date income as well as W-2 forms covering two years of employment is proof of your work record.
You may be able to show how extenuating circumstances created a brief employment gap. Otherwise, the obvious way to alleviate a significant deficiency is to continue employment for the desired time and then reapply for your construction loan.
Cash Reserves
Not being able to make the down payment required for your construction loan program could be a negative factor in your prequalification.
If you lack this cash reserve, you could count the equity from the land you own as a down payment for the construction loan or consider down payment assistance options.
As an alternative, you may be able to use “gift money” toward the down payment. Your loan officer can review any relevant gift money guidelines.
Appraisal Report
Unlike an existing property appraisal, the one required for a construction loan is based on the estimated value of the completed project—your planned custom home. A licensed appraiser will consider the “blue book” of information you provided earlier, assign a value to the land, and make a side-by-side analysis with similar building projects in comparable areas.
While it’s unlikely that a licensed appraiser will make a critical mistake to cause a hold on the prequalification process, it’s possible that essential construction details are missing. A thorough review of all pertinent information might be in order so that a revised appraisal can be requested.
It’s important to remember that not pre-qualifying for a construction loan is usually just a temporary stop on your path to custom homeownership. It may take a little longer to realize your goal, but you can be successful with patience and extra effort. Schumacher Mortgage is committed to making the construction loan process a streamlined, efficient, and hassle-free experience. Our team of professionals will be with you every step of the way.