Finance

How to Get a Construction Loan With Bad or No Credit

April 20, 2022

At some point in your life, you might need to take out a construction loan to finance the building of a home. However, if you have bad or no credit, securing a construction loan can be more difficult than extracting a bent nail from a floorboard.

That said, there are things you can do to qualify for a new construction loan—even if your credit score is lower than you’d like.

In this guide, we’ll explore the ins and outs of securing a construction loan so that you can start building the home of your dreams.

Can I Get a Construction Loan With Bad Credit?

The short answer is yes. Bad credit home construction loans do exist.

However, as stated above, securing these loans may be more complicated with bad credit.

That’s because most banks and lending agencies will take a look at one ultra-important number: your credit score.

What Does Your Credit Score Have to Be for a Construction Loan?

Fortunately, there is no hard cut-off for construction loan credit scores.

That said, most lending agencies will hesitate to approve your loan if your credit score is below 680. Some may even want a score of 700 or higher.

Even if you have a bad credit score, you may still qualify for a new home construction loan. Next, we’ll dive into the ways you can improve your chances of approval.

3 Tips For Getting a Construction Loan With Bad Credit

Just because you have a bad credit score doesn’t mean you should use your dream home’s blueprint as a fire starter.

By following the below tips, your chances of securing a construction loan can greatly improve.

1. Raise Your Credit Score

Let’s start with the obvious: raising your credit score is one of the best ways to improve your chances of securing a construction loan.

That’s because a good credit score tells your lending agency the following:

Your finances are stable – A good credit score (650+) lets the construction loan lender know your income is sufficient enough to pay back your debts. What’s more, stable finances are a sign of fiscal responsibility—a highly desired trait.
You’re good at repaying loans on time – Making regular loan payments shows lending agencies you’re responsible and trustworthy. Failing to repay loans in a timely manner presents a big red flag for lending agencies.
Your debt-to-income ratio is manageable – Debt-to-income ratio refers to your total debt in proportion to your income. If your debt-to-income ratio is high, lenders may be unwilling to approve you for loans out of fear that you won’t have the money to repay them.

Now, let’s discuss what you can do to raise your credit score.

How to Raise Your Credit Score

Raising your credit score isn’t as complicated as you may think. Here are a few ways to turn your credit score into a thing to be admired, not admonished.

Lower credit utilization – Credit utilization refers to the proportion of credit you use relative to its limit. For example, if a credit card has a $1,000 limit and you spend $100, you’re utilizing 10% of the card’s credit. Lower your reliance on credit in order to boost your credit score.
Pay bills on time – If failing to repay loans and bills on time hurts your credit score, making regular monthly payments greatly helps. It’s also important to pay off any outstanding bills and collection accounts as soon as possible.
Lower debt – Paying off debt is an excellent way to raise your credit score. Tackle the smallest debts first before chipping away at larger debts like education loans.
Diversify credit – Although credit scores are affected by high credit utilization, lending agencies like it when you have more than one line of credit. Open up a few credit cards and make regular payments on any balance you accrue.

While building back your credit is a great way to raise your credit score, this is often easier said than done.

Fortunately, loan alternatives exist. The best take your whole financial picture into account—not just your credit score.

2. Grab a Cosigner

If the saying “two heads are better than one” applies in decision-making, it doubly applies in the loan program approval process. A cosigner is especially important for a no credit construction loan.

In short, a cosigner is someone who agrees to take on a loan with you. Lending agencies use your combined financial profiles and credit history to see if you qualify for a construction loan.

Getting a cosigner is a smart move for several reasons. A cosigner makes you, as the potential borrower, less of a risk in the eyes of a lending agency.

If you’re thinking of grabbing a cosigner, there are a few things to note:

Your Cosigner Should Have a Better Credit Score Than You

This may seem obvious, but it bears repeating: your cosigner needs to have a better credit score than you so that lending agencies see the conventional loan as less risky.

If your credit score is below 650, get a cosigner whose credit score is in the 700s. Just as in bowling, the higher the number, the better.

Enlist the Help of Family or Friends

In general, family members and friends are more willing to help you out than acquaintances or relative strangers.

If your cosigner is your father, for instance, he may be more forgiving if you can’t hold up your end of the repayment bargain.

That said, enlisting the help of family and friends can also backfire. You run the risk of alienating the people closest to you if you fail to make payments and seriously threaten their finances. Your late or missed payments will affect their credit score, too.

The point is this: don’t take anyone’s help for granted—especially that of family members.

3. Don’t Get Discouraged

When lending agencies are rejecting your conventional loan applications left and right, it can be easy to feel defeated.

However, it’s important to remember that Rome wasn’t built in a day.

Being patient and doing your homework are two of the best things you can do to set yourself up for future success.

Here are a few things you can do to put yourself in the best possible position:

Research – Treat the loan approval process like a full-time job. This means researching several banks and lending agencies. Note the types of loans they offer and their interest rates. Also, note any disqualifying credit scores. That way, if one lending agency doesn’t work out, you know where to go next.
Don’t be overly eager – This may seem counterintuitive given the difficulty of procuring a loan in the first place, but you shouldn’t necessarily sign the paperwork with the first agency that approves you as the borrower. Always shop around. The last thing you want is an interest rate that adds to the lifetime payout amount of the construction loan rates.

Now that you know a few tips for securing a bad credit construction loan, let’s look at a few home construction loan options.

Home Construction Loan Options for Bad Credit

By raising your credit score, grabbing a cosigner, and staying on top of the process, you’ll greatly increase your chances of securing a bad credit construction loan with a favorable interest rate.

However, sometimes getting a traditional construction loan just isn’t possible.

That said, there are still pathways to procuring the finances you need to build your home.

Here are a few home construction loan options:

1. Secure a Home Loan Alternative

There are a few construction loans, and home equity loan alternative options.

If you already have a home and are looking to make a move to a new construction property, you may be a good candidate for a sales-leaseback arrangement to take advantage of home equity with bad credit.

Under a sale-leaseback arrangement, a homeowner sells their home to another party. The second party then leases back the home to the renter.

The advantages of this type of arrangement include:

You’ll convert your equity into cash
You can pay off debt and improve your credit score
With the right partner, you can get flexible lease terms

Lease-back arrangements don’t necessarily have hard income or credit score requirements. This means you can finance renovations or build a new home without having to worry about bad or no credit.

2. Get a Secured Construction Loan

A secured construction loan is secured with collateral. Common collateral used to secure these types of loans includes:

Properties
Automobiles
Businesses

If you default on a secured loan, the lending agency can seize your collateral.

If you’re finding it difficult to secure a construction loan, a secured loan can minimize your risk in your construction loan lender’s eyes. They know that if you default on your loans, they can still use your collateral as payment.

Keep in mind that this poses risk to you, as you could end up losing your current property or car if you fail to make timely payments on your construction loan.

3. Take Out a High-Interest Loan

Although bad credit construction loans can be difficult to get, you may still qualify for a high-interest loan—whether a personal loan, home equity loan, or another kind of construction financing.

That said, a high-interest bad credit construction loan comes with a ton of risk.

If the interest rate is truly unfavorable, you may find yourself only able to make payments on the interest, not the principle. That means that you’ll stay in debt for longer.

Key Takeaways

If you have bad or no credit, securing a construction loan can be difficult. Being persistent, attempting to raise your credit score, or finding a co-signer are all great strategies to help you get a construction loan with bad credit. If those don’t work for you or aren’t attainable, there are plenty of other financial solutions for you to consider including a home equity loan or sale-leaseback. Consult a business advisor to figure out what solution will work best for you.

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