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Building your own house can be a wonderful and fun experience – but it can also be a long and expensive process. However, most people cannot afford to pay for the cost of home construction up front, and getting a mortgage can be tricky.
After all, you’re asking a bank or a mortgage lender to give you money for something that doesn’t even exist yet.
A standard mortgage loan is not going to cut it – but you may be eligible for a special type of loan known as a construction loan.
Banks and mortgage lenders are often leery of construction loans for many reasons. One major issue is that you need to place a lot of trust in the builder. The bank or lender is lending money for something that is to be constructed, with the assumption that it will have a certain value when it is finished.
If things go wrong – for instance, if the builder does a poor job or if property values fall – then it could turn out that the bank has made a bad investment and that the property isn’t worth as much as the loan.
To try to protect themselves from this problematic outcome, banks often impose strict qualifying requirements for a construction loan. These usually include the following provisions:
Providing that you meet all these criteria and have good credit, you should be able to qualify for a construction loan. Generally, lenders also require information regarding your income (to be sure you can afford the mortgage payments) and your current home, just as they would with any type of standard mortgage loan.