The Finance Blogger

New Home Construction Loans

New Home Construction LoansOur latest reader has posted a question about new home construction loans in general and is also asking why he may not be eligible for a loan. He and his wife make a relatively good income. They have stable jobs which they have been at for 10 years and they have an excellent credit rating. They also have $30,000 to place as a down payment on the property and they already own the land. they have the plans, but have not proceeded with obtaining building permits or hiring a contractor as of yet. He wants to know why it is so difficult to obtain a new home construction loan and what he can do to improve his chances?

New Home Construction Loans

New home construction loans are much more difficult to obtain even when you have everything lined up, a great reputation from a credit perspective and also from a builder perspective. Individuals usually lack in the latter category and many banks will just shy away from them, thinking there is just too much risk associated with this type of loan. There can be a lot of risk in terms of the builder completing the home as well as schedule issues that many banks are just not willing to take on.

Factors in the favor of this particular couple include:

  • They already have the land
  • Their credit rating is excellent
  • They have $30,000 saved for a down payment
  • The plans have been drawn up by an architect and
  • They have stable jobs and income.

There are a number of factors which are really hurting them in terms of getting someone to listen to them and approve a loan for the construction of their new home:

  • No apparent estimate yet for construction costs, just a budget
  • No contractor committed to build the home at a specified price
  • Little experience in building homes
  • No experience in managing a prime contractor or sub contractors
  • The loan application is for the home as well as landscaping and furniture

All of these are big negatives for this couple in terms of a new home construction loan.  Many banks will just not take the risk in this type of situation. In addition another big glaring issue is the intent to finance all of their furniture as well! Most lenders will lend money to finance the home, but not to furnish it.

The main issue of course for the lender is the associated risk when it comes to lending money. In this case the perceived risk is quite high. Without the experience of managing a homes construction, the bank will be concerned about construction over runs. They will be concerned about ending up financing a half finished home that needs more funds to make it livable.  The bank may be able to be convinced to lend the money if this couple hires a foreman or builder. One with a good reputation and has an opportunity to review all of the contracts. They want to ensure that the project is well managed and the risk factors are reduced.

Further Recommendations

We would like to be able to make addition suggestions to this reader regarding finding a new home construction loan. However with the issues identified they are just too many and too significant. We are unable to recommend a bank to them that would be willing to lend them the funds they need. Each of these issues can be solved and it will be up to them resolve these concerns to the satisfaction of the lender. There are courses that can be taken to help them understand all of the issues and tasks associated with building a home. Once they have taken this course they may be in a better position to understand the problems and deal with them.

This in turn will reduce some of the risk factors identified by the banks and help them  secure the new home construction loan they would like. Your comments are welcome as well in terms of advice that you can provide to this couple. For more information about construction loans, click here.


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2 Responses to “New Home Construction Loans”

  1. We tried getting a home construction loan and could not , the banks would just not approve it for us

  2. A new home construction loan is very difficult to get from a bank. They really make you go through a lot of red tape to be approved for a loan

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