Building a custom home is an exciting process, but it also requires careful preparation—especially when it comes to financing. Many clients aren’t aware of what lenders require for a construction loan, and realtors often find themselves answering questions about prerequisites, timelines, and documentation. To help guide both agents and clients, here is a clear overview of what buyers need before beginning the new construction financing process.
New Construction Financing: What Clients Need to Know Before Building on Their Land
1. Basic Borrower Requirements
Lenders evaluate several factors to determine whether borrowers are financially ready for a construction loan. A solid credit history is essential, with most lenders looking for mid-600 credit scores or higher, and the best interest rates typically going to borrowers with scores of 700 or above. Lenders also require a stable employment and income history, usually over the past two years. Another key factor is the borrower’s debt-to-income ratio, which generally needs to stay below 45 percent in order to qualify. Finally, clients must show proof of funds that will cover their down payment, closing costs, and any required reserves.
2. Client Documentation Checklist
To verify financial stability, lenders request specific documents throughout the approval process. Borrowers will need to provide at least two years of tax returns and W-2s, or profit-and-loss statements if they are self-employed. Recent pay stubs covering the last 30 to 60 days help confirm current income, while bank and asset statements from the last two to three months demonstrate available funds. Lenders also require a valid photo ID along with the standard application information.
3. Project and Builder Requirements Beyond personal financials, lenders need to ensure the construction project itself is clearly defined and feasible. This begins with a signed construction contract that includes a full cost breakdown. Borrowers must also provide finalized or nearly finalized building plans that outline the home’s design and specifications. Most lenders require that the chosen builder be licensed, insured, and approved through their internal review process. A defined construction timeline—including projected start and completion dates—is also necessary for the loan to move forward.Induction Cooktops and Ranges
4. Property and Appraisal Requirements
The property plays a key role in the financing process. Clients must provide either a lot purchase agreement or proof of land ownership. An appraisal is then conducted based on the completed home’s “as-completed” value, which allows the lender to assess the future worth of the property once construction is finished. Additional items, such as a site plan, land survey, or engineering documents, may also be required depending on the lender and the nature of the land.
5. Using Land as Collateral
One of the biggest advantages for clients who already own land is the ability to use their lot as collateral. Many lenders allow the land’s equity to serve as the down payment for the construction loan. This can significantly reduce—or even eliminate—the amount of upfront cash the borrower needs. Because the land is included in the overall appraisal, its value is applied directly to the total project financing. In many cases, this option allows clients to begin the construction process with minimal out-of-pocket expenses.
6. Cash and Reserve Requirements
Even when land equity is used, some lenders may still require additional funds. Most construction loans call for a down payment between 5 and 20 percent, although this amount is often reduced (or eliminated) when land is used as collateral. Borrowers should also expect standard closing costs associated with the construction loan. Additionally, lenders typically require a contingency reserve of 5 to 10 percent of the project costs to protect against unexpected expenses or changes during the build.
Ready To Build?
If you’re considering building a custom home, working with an experienced team can make the process smoother and less stressful. Understanding the new construction financing requirements ahead of time helps ensure your project stays on track from land purchase to move-in. At Idaho Impact Homes, we specialize in guiding clients through every step of building a custom home, from selecting the right lot to securing financing and completing construction. Reach out to Idaho Impact Homes today to learn how we can help make your dream home a reality.
