Sometimes, having the perfect home means starting the construction from the ground up. Building a house takes a hefty budget, so you may visit a mortgage broker in Dallas, TX, to secure a construction loan. However, you may wonder how to get a construction loan with bad credit.
Here, we explain what you would need to secure a loan to construct a house without a perfect credit score.
What Is an FHA Construction Loan?
Homeowners and real estate developers may use FHA construction loan programs to secure funding for new construction. This loan type works like a conventional home loan, providing short-term financing to cover construction costs, including land and labor.
The difference between a conventional loan and an FHA construction loan is that the Federal Housing Administration insures the latter. As a result, borrowers must have a credit score of 580 or higher and can make a down payment as low as 3.5%.
How To Improve Your Chances for Loan Approval
Let’s say your credit isn’t the best. Do you know how to get a construction loan with bad credit?
Your first option is to increase your credit score by paying down your debt and disputing credit report errors. This method may take time, but improving your credit score would increase your chances of loan approval.
You could also do the following:
- Apply for the FHA construction loan with a co-borrower.
- Consider a two-time loan to boost your credit during construction and before you apply for a permanent mortgage.
- Increase your down payment to 10% or more.
FHA Construction Loan Requirements To Remember
Most construction loans have a one-year term, during which the lender regularly inspects the construction. The lender will release payments to the contractor as the project meets specific milestones. After the home’s construction, the loan can become a traditional mortgage, or the borrower can obtain a home loan to pay off the construction loan.
To secure an FHA construction loan, you must meet the following criteria:
- Credit score: The minimum credit score is 580 for a 3.5% down payment. However, your credit score can be as low as 500, and you can put down 10%.
- Mortgage insurance: You must purchase and maintain FHA mortgage insurance and pay the annual premium.
- Debt-to-income ratio: As a borrower, your debt-to-income ratio can’t exceed 43%, unless you meet certain exceptions.
- Loan limits: The amount you borrow can’t exceed local FHA loan limits.
- Occupancy: The construction loan is only valid for primary residences.
Find the Best Rate for Your Home Construction Loan
Our specialists at Champions Mortgage Team know how to get a construction loan with bad credit. As a go-to lender in Texas, we offer personalized service, affordable rates, and fast home closings.
Find out what sets our team apart from other mortgage professionals by calling Champions Mortgage Team at (281) 727-2500. Schedule a consultation today.
FAQs About Construction Loans
Learn additional details about construction loans with our answers to common questions.
Do Lender Guidelines for a Construction Loan Include a Minimum of 20% Down?
Lenders don’t always require a 20% down payment for construction loans. However, making a high down payment may eliminate the need for private mortgage insurance.
Why Is It More Difficult To Get a Construction Loan Than a Traditional Home Loan?
Securing a construction loan is usually more difficult than getting a traditional home loan because the house isn’t readily available in the first option.
Do I Need Good Credit To Get a Construction Loan?
Bad credit may not stop you from getting a construction loan. Part of knowing how to get a construction loan with bad credit is understanding that the credit score requirements for FHA loans differ from those of conventional loans.
