Finding the perfect house can be tough. You may spend months searching, only to find that the perfect place on the perfect property doesn’t exist. By purchasing your ideal plot of land and building a home to your own specifications, you can achieve your dream home, but you’ll probably need a loan before you can get started. To get a construction loan in Tennessee, you’ll first need to have blueprints, a construction schedule and a budget, but you’ll also need to get approval for the loan from a bank or credit union.
About Construction Loans in TN
There are numerous banks that offer construction loans in Tennessee, and you should shop them all before you settle on one. Bank of Tennessee and Wilson Bank and Trust are two popular Tennessee banks that offer construction loans at competitive rates, but there are many others. For builders, construction loans are issued as business loans, but individuals have a different type of lending need.
If you’re planning to take out a loan to build a home, you’ll need to look for construction to permanent loan lenders. The loan will cover the purchase of the land, plus the cost of construction, typically for a duration of no more than 12 months. Once the home is built, that loan will convert to a traditional mortgage.
Applying for Construction Loans
To apply for construction loans in TN, you’ll need to provide your expected timeframe to the lender, complete with building plans. You should also have a full budget covering all likely costs. This means before you approach a lender, you should have completed all your planning and be ready to get started.
That doesn’t mean you have to do all of that planning without any idea whether you’ll be able to get the loan in the first place. Many banks that offer construction loans will let you get preapproved before working with contractors. The process of getting the blueprints and home design you’ll need will cost money, so you’ll understandably want to make sure you’ll be able to follow through with it.
Getting Approved for Construction Loans
Banks that offer construction loans will have stricter qualifications for borrowers than a standard mortgage. There’s a reason for that. When you take out a loan to buy a house, the home itself serves as collateral. During the building process, though, the collateral is just the land itself, which isn’t worth nearly as much as a property with a move-in ready building on it.
Most construction to permanent loan lenders will require good to excellent credit, a stable income, a low debt-to-income ratio and a down payment of 20 percent. If extra costs arise during the process, the lender will also want to see a healthy savings account that can help cover them.
Getting USDA Loans in Tennessee
Before you seek out banks for construction loans in TN, consider setting your sights on a United States Department of Agriculture loan. You’ll still have to go through the approval process, but the USDA’s requirement that you work with a USDA-approved builder will boost their confidence as they consider your application. That does bring a new issue, though, in that you’ll be limited to builders that meet the USDA’s requirements, including at least two years of experience in building single-family homes and proof of at least $500,000 in commercial liability insurance.
The biggest benefit of a USDA loan, though, is the fact that it’s a single-close loan. With traditional building loans, construction-to-permanent loan lenders will require you to apply for and close two separate loans: one for construction and one for the mortgage. The USDA’s loan is a single-close loan, combining both into one, which can save you thousands of dollars in closing costs.
- In many cases, two loans are required: one for construction and one for permanent financing. Usually you will have to pay closing costs on both loans, advises the Tennessee Home and Loan website.
Stephanie Faris has written about finance for entrepreneurs and marketing firms since 2013. She spent nearly a year as a ghostwriter for a credit card processing service and has ghostwritten about finance for numerous marketing firms and entrepreneurs. Her work has appeared on The Motley Fool, MoneyGeek, Ecommerce Insiders, GoBankingRates, and ThriveBy30.