How to Get a Construction Loan with Bad Credit

When you need construction loans, bad credit can really limit your options. Loans of all kinds are becoming more difficult to obtain because the standards of lending are getting harder to meet. That doesn't necessarily mean you'll have to put your dreams on hold, but you will need to take a few steps before you apply for a construction loan.

Construction loans are products offered by banks and other lenders. A construction loan can be used to build your first home, build a second home while you still reside in your primary residence, or make additions or repairs to an existing home. Construction loans typically have short durations, and some are simply converted to mortgages once the construction has been completed.

As with any loan, your chances of being approved will increase if you can minimize the risk to the lender. But what if you already have a bad credit rating? Fortunately, there are plenty of ways to get the construction loan you need, regardless of your credit rating.

Improving Your Credit Score

First, you need to know how bad your credit really is. Get a copy of your credit report. Check it carefully for any mistakes that might be lowering your credit score. Dispute those items to get them off of your report. Just removing inaccurate negative items can raise your credit score by several points.

Now look at the other negative items on your report. Bankruptcies and repossessions will disappear seven to ten years after the date of the last account activity. If you have items on your credit report that are nearing their drop-off dates, you might want to postpone your construction.

Pay off newer items as soon as possible. Don't worry if your score doesn't rebound immediately; the fact that you paid off your debts will make a lender look at you more favorably. Also, make sure that none of your credit card accounts are nearing their limits. A 30% debt-to-credit ratio on each card is ideal.

If your score is still sub-prime after applying these fixes, getting a construction loan will be a challenge. Most lenders will consider you a high-risk borrower if your credit score is below 680. With a low credit rating, you will have a much better chance of obtaining a secured loan than an unsecured one.

Secured Construction Loans


Secured loans are good for people with poor credit, no credit, or those who have a lot of debt obligations. When you apply for a secured loan, you put up property as collateral to secure the loan. This gives the lender the right to take possession of that property if you default on your loan. Secured loans do put your property at risk, but they also present a financing option for borrowers who can't qualify for unsecured loans.

Building a home is expensive, so you'll need something valuable to offer up as collateral for a secured construction loan. If you own the land where you want to build your home, you can use that for collateral. If you simply want to expand an existing home or do some repairs, you can use the house as collateral.

Large Down Payments

What if you don't have valuable property, or don't want to risk losing it if you can't repay your debt? In this situation, a large down payment can help you get the loan you need. It's not easy to come up with a large lump sum, but you can make it happen through careful financial planning.

How much of a down payment should you make? For sub-prime borrowers, 20% or more is recommended. This is substantially more than a prime borrower would be required to produce, but remember that the lender is taking a big risk by loaning money to someone with a spotty credit history. Putting down 20% of the requested loan amount up front will show the lender that you mean business.

Research Your Options

You might have additional resources at your disposal. If you're a member of the military, you might be able to get a construction loan through the government. Some credit unions are willing to take a chance on members with less-than-perfect credit scores. If you've been a long-time account holder at a local bank, explain your situation to a loan officer there. They might have more lending discretion than officers who work for large national banks.

Don't Give Up

There are construction loan options for everyone. You just need to know where to look. If your bank or credit union can't help you, go online to compare rates on construction loans. Some lenders even specialize in high-risk loans. You will pay a higher interest rate than a prime borrower, but at least you'll get the financing you need to make your home construction a reality.