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Understanding Home Building and Construction Loans: Building Your Dream Home

The lenders want what you want. They want you to be prepared for a smooth and successful project. Most lenders state in interviews with owner-builders: "They have to convince me they can do it."

Lenders are justifiably wary of the typical owner-builder candidate for a construction loan. Construction lenders find owner-builder's woefully unprepared on average to control a project and bring it in on budget or on schedule. Since it's the bank's money, the lender can't help but wonder why these same candidates can't make the effort to reduce project risk before they take out the loan. Most owner-builders leave too much to chance, and lenders know it. The lender wants to see that this is a no-risk proposition. Which is exactly what you want.

Remember, when you take out a construction loan, it's not your money. The bank lets you use their money in return for your commitment to repay them (with interest). They have to be sure you will repay, and in the event you don't, they want the house you build to have plenty of equity so that they can resell it and recoup their investment.

When you meet with a lender, you should address their concerns decisively. The leading concerns are:

  • Risk - Prove that you have done the necessary planning to pull off a successful project. Document your financial soundness and financial qualifications. Show that you have secured the necessary insurance coverage to protect the lender from liability.
  • Quality - Show that your house will meet any and all quality standards, resell easily, and be a good risk for their investment.
  • Cost Control - Demonstrate that your house will be built for a competitive price, and that you will stay reasonably within budget.
  • Job Control - Convince the banker that your house will be finished well within average and reasonable time limits.
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