Pre-qualifying means assessing all of your financial resources (
Evaluating Your Financial Capacity: Pre-qualifying (Article # 2 in Our Series on Demystifying the Home Construction Loan Process)
Because
you can’t design a house until you have an idea of what you’ll be able to
spend, you need to set your project budget before you begin seeking a builder
or settling on a houseplan,
You do
this by pre-qualifying, a fairly simple step in the mortgage process.
Pre-qualifying can be done in person or over the phone and is provided as a free
service by most banks and mortgage companies.
“To be
pre-qualified, we look at the cost of the land and the cost of the home,” says
Joe Bartolomeo, vice president and branch manager of the Fairfield,
Connecticut, offices of Total Mortgage Services. Then, he says, he speaks with
the borrower in order to assess a variety of factors: income, other properties,
debts, student loans, credit report, and other financial obligations such as
child support or alimony.
There are
automated forms online that can help you pre-qualify, but they can be difficult
to use. “Financial and personal information is not universal. Self-employed
people have different tax forms than those who are salaried or who work for an
hourly wage,” says Joe. “There are hiccups with those automated systems,
because there are so many different ways of reporting financial information.”
The
lender will look for 20% down, Joe says. “But if you already own the land you
plan to build on free and clear, you have equity there, which you can use as
your 20%.”
When
looking for a lender to pre-qualify you for the loan, “You can shop around [for
a better deal] the way you shop for anything,” Joe says. “But a lot of lenders
have pulled out of doing construction loan mortgages. They’re a little more
difficult because of the risks involved. So there are fewer players. And you’re
not likely to find construction loans on LendingTree.com or other places like
that.”
He adds
that some of the banks that do construction loans only do them in certain
states. “Many have pulled out of Florida and Nevada, or other states where you
see the housing bubble has crashed,” he says. “But it’s coming back little by
little, with more people getting involved in construction loans.”
Another
aspect you should know is that if you’re building the house as an investment,
you’re unlikely to get a loan. “We don’t lend on investment homes, and in
general, I don’t know of anybody who does,” Joe says. “We lend on primary
residences or vacation homes.” Note that
pre-qualifying is by no means a commitment from the lending organization. It is
simply an idea from the lender of the amount you might qualify to borrow. You
have not yet officially applied for the construction loan, and will not do so
until after you have contracted with a builder, nailed down your house plans,
and gotten zoning approval. These subsequent steps will be covered in our next
article.