How to Apply for a Construction Loan

Construction loans are issued for the time period in which construction is to take place. Since most buildings don’t take 15 years or longer to construct, the monthly payments can be higher for construction loans if they are not financed in such a way as to either delay payments until completion of construction or after becoming non-construction permanent loans.


Construction loans require construction loan applications that require information and documentation pertaining to the borrowers financial profile, project feasibility and legitimacy and builder related data. For example, in the case of a construction loan obtained from a bank, information about the builder, contractors, site location and details, in addition to the borrower(s) financial profile can be required.

The following link is a sample individual construction loan checklist that illustrates some of the documents required by construction loan lenders. In the case of businesses applying for construction loans, documents and information relating to the businesses’ financial profile are included in the application. As with mortgages, many documents may be requested by the loan officer or the application. Some of the items a lender may look at are listed as follows:

Building related information:

* Construction permit
* Builder references, licenses, insurance and contracts
* Contractor references, licenses, insurance and agreements
* Professional appraisal of construction costs
* Liens on property if any
* Materials and labor cost details
* Land zoning authorization

Individual information:

* Tax filings from previous years
* Pay stubs and employer information
* Assets and liabilities documents
* Credit report and score
* Personal identification
* Cosigner documentation if joint


Since construction loans are complicated and involve a lot of details, patience and dedication to properly completing the loan application process is useful not only in protecting the lender, but the borrower from wrongful practices. The construction loan application can assist with reviewing and rethinking the construction, its terms, costs and potential pitfalls.

* Acquire three references from each builder and contractor
* Utilize a building appraiser who is not connected to the builder
* Obtain multiple bids on building contracts and sub-contracts
* Finance through the builder at low rates
* Agree to terms that pay only in accordance with project completion
* Try to get a transition loan that converts to a mortgage after completion
* Establish an escrow account early for construction-mortgage conversion costs


Construction loans can be obtained from either builders, developers or financial institutions. Not all banks offer construction loans so locating a financial institution that offers construction loans is an essential step in acquiring one. Shopping around for construction loan lenders that have a variety of construction loan products and services and low rates and mortgage lending may be advantageous as a full service construction loan lender could save a lot of headaches associated with obtaining the loan.


As with many ventures, there are advantages and disadvantages to construction loans. The dream of building a self-designed property can be a nice one and may pay off in the end, but there are many areas where complications can arise and costs can surpass expectations. Being aware of the advantages and disadvantages of construction loans can be helpful.


* Cost of building may be cheaper than purchasing new
* Design specifications can be customized
* Equity may be built into property during or soon after construction
* Location of home can be chosen in accordance with land zoning
* Sales tax on building materials is deductible on IRS Form 1040, Schedule A
* Interest on the construction loan may also be tax deductible


* Builder may file for bankruptcy
* Monthly payments can be higher
* More documentation is required than a mortgage
* Annual Percentage Rates can average higher than mortgages
* Strong collaboration is needed to facilitate the building
* A land loan may also be required
* Income may vanish leading to delinquency


Construction loans are used to finance construction projects such as homes, warehouses, and office space. These types of loans may be converted into permanent loans upon completion of construction and if done, a new application procedure can be bypassed. There are many details involved with construction and consequently, when applying for a construction loan from a bank, the bank will want to know a lot of these details. Some builders offer financing themselves. This simplifies the process but may or may not cost more. As with many things, the pros and cons of construction loans might be best considered carefully and patiently.