8 Tips for Getting a Construction Loan When You Have Bad Credit
Are you looking for a loan without a good financial history? Here are 8 tips to help you with getting a bad credit construction loan.
What if bad credit didn’t get in the way of your home construction dreams?
Poor credit doesn’t have to be a dealbreaker when you need a loan. In fact, you can qualify for a bad credit construction loan almost right away.
Wondering how you can build the home of your dreams with poor credit? All you have to do is follow these easy tips!
1. Understand Your Credit
People throw around terms like “bad credit” very often. But before you can earnestly pursue the best construction loans, you need to know exactly what your credit looks like.
You can manually order credit reports whenever you want from Equifax, Experian, and Transunion. But to save money and time, you should really sign up for a free monthly credit monitoring service.
Such services are a great way to get an immediate snapshot of your credit score and credit details. And by staying on top of the reports each month, you can also trace how different actions have positive or negative effects on your credit.
By reading these reports, you can discover and contest potential errors that may negatively impact your credit rating. Furthermore, you can start developing a plan to raise your overall credit rating, making it easier to obtain a good construction loan.
2. Raise Your Credit
How do you get a good loan with bad credit? If possible, you change the rules of the game by improving your credit!
There are a handful of factors that are likely to drag your overall credit score into the gutter. By addressing those things, you can improve your overall score and begin qualifying for a world of lending possibilities.
Most of the free credit monitoring services will make personalized recommendations about raising your credit score. This is really handy if you want to make a long-term game plan to raise your score. In the short-term, it’s fine to simply focus on paying down debt.
Your credit card debt is an obvious target if you wish to quickly raise your overall credit score. If you can focus on paying down these debts, you’ll watch your credit score improve in no time.
Your goal should be to use no more than 15% of the credit limit on your assorted credit cards. To some degree, you can control this by spreading necessary debts across multiple cards instead of piling everything on one or two cards.
If at all possible, you should try to pay all of your cards down before pursuing any major construction loans.
3. Pay Off Debts
Credit card debt isn’t the only thing that can drag your credit rating into the gutter. If you have any old debts that have been turned over to collections, these debts will have a major impact on your credit score.
The easiest solution is to pay these debts off right away. If this is not an option, though, you can get creative with your solutions.
For example, you can reach out to the original lenders and work out some kind of repayment plan on the amount. If you are willing to do this, they may be willing to make a positive adjustment to your credit report.
It’s important to get credit for the debts you’ve already handled. By reviewing your credit report, you may discover that some of your paid-off debts still appear in your file. By contacting the appropriate lenders, you can have those debts removed and boost your credit.
Similarly, you need to keep an eye out for any unfamiliar debts. If your credit card number or other information is compromised, you may be subject to fraudulent charges that can negatively impact your score.
4. Pay Attention To Your Debt-to-Income Ratio
What does a lender look at before approving a new construction loan? One of the biggest factors is your debt-to-income ratio.
This is exactly what it sounds like. Potential lenders will look at the number of your monthly debt payments and compare that amount to your monthly income.
Most lenders will not approve a new loan if your ratio is higher than 41-43%. If possible, you can improve your construction loan chances by making additional payments and reducing the ratio.
Another tactic is to compensate for your high debt-to-income ratio in some way. For example, having a large amount of money in savings or putting down a large payment can help mitigate lender concerns and speed the approval of your construction loan.
5. Be Patient
When you need a construction loan, you may be on a tight schedule and need to make moves right away. If you can afford to wait, though, a little patience can be very good for your credit score.
This is particularly true if your score is low because of issues like collections, defaults, judgments, and even bankruptcy. While these can have a serious impact on your score, none of these things will stay on your credit report forever.
For example, collections, defaults, and judgments only stay on your report for a period of 7 years. And bankruptcies (such as Chapter 7 and Chapter 11) stay on your credit report for a period of 10 years.
Long story short? If any of these things dragged your credit score down happened a long time ago, it may be worth playing the waiting game. Eventually, your score will improve automatically, making it easier to get money from construction loan lenders.
6. Factor In Additional Income
Speaking of lenders, they will factor in more than just your credit score. They are also going to pay close attention to your income.
This is meant to be in your best interests. After all, approving a loan that you cannot realistically pay will hurt all parties involved.
However, the lender may be underestimating what your income actually is. That’s because they are likely to focus primarily on your annual salary and not notice other forms of income.
By speaking with your lender, you may be able to update your application with these additional sources of income. And with a correspondingly higher annual income, you may be able to qualify for a better construction loan.
Some additional forms of income may include disability payments, social security, trust income, and pension income. The lender may also look at money from capital gains as well as interests and dividends.
If it serves as a regular source of income, make sure the lender is aware of it. This may make the difference in helping you get the loan you want.
7. Get A Cosigner
It’s easy to overthink the process of getting a construction loan. In many respects, the process of qualifying for, and applying for a construction loan is similar to applying for any kind of personal loan.
And that means some of the same tips and tricks still apply. For example, someone with poor credit may want to seek out someone with good credit to serve as a cosigner.
The actual cosigning process is pretty straightforward. Once both of you are on the loan, the lender will now evaluate both sets of income and both sets of credit scores.
Your poor credit score will hopefully be offset by the other party’s good credit score. In terms of income, the lender will simply combine your income to determine what you are capable of paying back. This can help you qualify for more money than you would otherwise be able to get.
Make sure your cosigner is aware that they are just as responsible for making sure this loan is paid back as you are. Slow payments and missing payments can have a negative effect on each person’s credit scores.
8. Do Your Homework
When you have bad credit, it can be a little discouraging applying for a construction loan. No one wants to spend a lot of time and money only to get rejected by a lender.
However, you have one major factor on your side: the sheer number of lenders. While you may get rejected by the bank down the road, there are a number of other lenders (both locally and online) where you can take your application.
In fact, you’re likely to get approved by multiple lenders after you apply to several places. But you need to really do your homework and check out the interest rates and fees that each lender is offering.
That’s important because you don’t want to just jump at the first approval you receive. If you don’t check the fine print, you may never notice the scary interest rate until it’s too late!
Ultimately, you should approach getting a construction loan the way you approach most challenges in life. It’s best to have as many options as possible so you can select the loan and the lender that are best for your needs.
Getting A Bad Credit Construction Loan: What’s Next?
Now you know some tricks to getting a bad credit construction loan. But do you know where you can apply for the best construction loans right away?
Here at Orchard Funding, we specialize in helping you build your dream home from the ground up. To see how we can help you build a better future, apply for a loan today!