Qualifying for a construction loan requires a good credit score and the ability to pay it back. What many homebuyers do not understand is that there is more to know than just the basics. A good rule of thumb to follow is to ask if you do not know or understand. For instance, loan to value and loan to cost are two examples of financial jargon that most of us do not have a clue as to what they are. Before signing any financial documents, ask the company to explain what they are and why are they so important in getting a home construction loan.

After submitting a construction loan application, a financial institution will look at two things: loan to value (LTV) and loan to cost (LTC). A loan to value is calculated by dividing the appraised value of the home by the loan amount. This percentage will determine how large or small your down payment will be. This typically is the better loan because the down payment may be a lot lower than having a loan to cost if you do not have enough equity. The downside with a loan to value is the land must not have any liens.

The loan to cost (LTC) is calculated on the amount of cash equity you have on hand to make as a down payment or to invest in the land you are building on. This loan is good for people who have paid off their land or have put down a substantial cash amount. Remember, that most banks require 5% to 20% cash equity before lending money to consumers. Therefore, it is a great idea to pay off as much of the land as possible to increase the land’s equity.

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