When you are in the market for a construction loan, you have to present a lucrative package to the lender in order for him to want to approve you for the loan. This is not an easy task as lenders are very choosy about who they provide construction financing to because of the risk involved in this type of loan. In order to make yourself look as good as possible, understand the documentation for construction that you will need to provide in order to get the home construction loan process started.
Financial Documentation for Construction Loans
An obvious aspect of the construction loan is the proof that you can afford it. This means you will have to provide the lender with the documentation to prove your income, employment, and assets. These items can be proven with a variety of documents:
- Past 2 years’ W-2s if you are employed by someone
- Past 2 years’ tax returns with your 1040 and all schedules if you are self-employed
- Verification of employment form completed by your employer to verify your employment dates and current status
- Letter on the letterhead of a professional, certified CPA that provides your financial advice or prepares your tax returns for you if you are self-employed
- Pay stub showing the most recent 30 days’ worth of income
- Bank statements for the past two months showing any self-employed income
- Bank statements to show any reserves or proof of money for the down payment
If there is anything “non-standard” about your financials regarding the construction loan, it is best to provide those documents right away. A few examples of this includes a divorce decree if you are divorced; court ordered child support documents if you pay/receive child support; any evidence of social security or disability income you receive; proof of any investment income you receive from rental properties; or any other miscellaneous income and/or payments that you make on a regular basis that will play a role in your loan approval.
In addition to proving that you can afford the construction loan is the ability to prove that builder is qualified for the project. Because the bank is going to be providing funds for a risky loan, they need to fully evaluate the builder to ensure that he meets the requirements set forth by the lender. The documents needed for this process include:
- Adequate description of the intended materials to be used for the project
- Resume of the builder showcasing his past history with building houses
- References from the builder that allow the lender to verify them and the work that the builder does
- Copy of the credentials of the builder including the license and insurance that allow him to be a builder
- Proof of adequate insurance, which means insurance that covers any mishaps that can occur on the job
Documents Pertaining to the Construction of the Home
Last, but not least, you need to provide documents regarding the construction of the home. This includes detailed descriptions of the work to be done as well as how the money is going to be used. The following documents must accompany your loan package in order for you to be eligible:
- A final copy of the building plans
- A budget in writing that shows how each category will be paid
- Detailed listing of any items that were pre-paid and how those items were used
- Contract detailing all of the construction to be done, signed by the builder and yourself that includes the builder’s name, address, and contact information
- A copy of the plat of survey
- Proof of ownership of the lot, if you own the land already
These are just a general sampling of the documents needed for a construction loan. As is the case with any type of loan, your specific lender may have his own requirements. Any loan that you apply for will also require you to complete a Residential Loan Application Form and have it signed and dated by all parties involved in the loan. The quicker you are able to provide these documents to your lender, the faster you will be able to get approved for your construction loan. If you find that you are not eligible with one lender, be sure to shop around as every lender has their own requirements for this type of loan and since it is one that is typically funded by private banks and/or investors, the guidelines can vary widely from lender to lender.
Justin McHood is America's Mortgage Commentator and has been providing expert mortgage analysis for over 10 years.