By today’s standards, one is considered successful if they are able to purchase a house that has been custom designed and built by a professional home builder. Buying a brand new home custom built by a professional symbolizes financial stability and high accomplishment. Aside from being a status symbol, having a house custom built also has practical advantages. It allows the buyer to choose a design to their own liking rather than conforming to the design of someone else’s. The following is a step-by-step guide on how to obtain a construction loan for building a home.

Shop for a Lender - Building a house from scratch begins with obtaining a construction loan from a bank or other lending institution. The most important part in obtaining financing is to shop for a lending institution that offers the best type of advance at the best rates. Buyers should also invest their time in shopping for their extension of capital by talking to more than one bank and comparing all of their interest rates. Ask for the construction loan department and speak to an officer to inquire about the types of advances available for the building of a new home.

Once buyers have contacted all of the local banks and are unable to find a financing package that will fit their budget, they can call an experienced construction loan broker. This special type of broker serves as a middle man, and has direct access to hundreds of banks that offer building advances. Buyers can reap the benefits of services provided by a construction loan broker without having to worry about fees because brokers are able to obtain financing packages at a wholesale rate and then pass those rates on to their clients at fair retail prices.

Determine the Best Lending Option - After finding a lending institution that offers construction advances, the next step is to determine what financing option will suit the financial ability of the buyer. There are a variety of options in construction loan rates to choose from, such as 30-year fixed, 15-year fixed, 1-year ARM, 3/1 ARM, 5/1 ARM, 7/1 ARM, 10/1 ARM, as well as interest only loans. Before applying for an advance, make sure that the lending institution has a broad experience with construction financing packages. Look for a lending institution that is well versed in the climate of the real estate market at the proposed construction site.

Determine Whether a Locked-in Rate or a Floating Interest Rate is Suitable for the Loan - If interest rates are expected to rise, it is best to choose a locked-in rate. If the interest rates are in a downward trend, it may be advisable to go with a floating rate. Be careful when opting for a locked-in rate, as some lenders charge high interest for locked-in rates.

Loan Application – After determining the best construction loan option, the next step is to complete the application. Building advance applicants are required to fill out an application form called a "1003." Some of the information requested on the "1003" includes the type of advance being requested, the amount of the loan, address of the applicant, social security number of the applicant, a list of assets and liabilities, income of the applicant, as well as a list of any real estate the applicant may own. All the information requested on that form will provide the loan officer with a clear picture of the financial status of the applicant. One of the most crucial details the loan officer will look at is the income to debt ratio. To successfully qualify for an advance at most banks, the ratio between income and debt should not exceed 36 percent to 45 percent.

Signing a Contract With the Contractor – It is important to find a home builder that has a significant amount of experience and credibility. Hiring a reputable contractor with plenty of experience is important because every construction loan has a section known as the builder’s package. This section includes the contractor’s previous experiences, personal references, credit and banking references, item cost breakdown, materials list, and the construction contract.

Obtain Insurance – It is very important for the buyer to obtain construction insurance. When a house is being built, banks normally require the buyer to carry course of construction insurance and general liability insurance. With general liability insurance, choose a contractor that already carries that type of insurance to avoid any unnecessary expenses.

Living in a custom built house is one thing that many people dream about for many different reasons, yet only a few are actually able to see such a dream come true due to the seemingly complicated process in obtaining a construction loan. Use the above list of steps to obtain the best construction financing package and get that custom house built!