How to Get a Home Loan With Bad Credit If You Own Your Own Land

Getting a loan to finance just the building of a home is significantly easier than securing funds to buy a home and the land it sits on, even if you have bad credit. In any moderately populated area, the land itself usually makes up the bulk of the value of a property. Building a home with the right contractors and a sensible budget can make the project affordable. A home construction loan is similar to a mortgage but involves more paperwork and imposes more requirements on the borrower.

Find a lending institution that provides construction loans in your area. Because you have bad credit, you will need to put down a substantial down payment on the loan to be approved. You may also be required to pay for private mortgage insurance (PMI) that covers the lender in case the bank has to foreclose on the house.

Look for lenders that offer construction-to-permanent-financing loans if you would like to increase the period during which you can repay the loan. Ordinary construction loans must be repaid within six to 12 months after first borrowing them. A construction-to-permanent-financing loan essentially transforms it into an ordinary mortgage after the construction is completed.

Prepare a construction plan with your building contractor to show to the lender. Lenders will not make construction loans unless they see a building plan, a budget and an estimated home value. Construction loans are non-standardized, so it's very difficult to compare the rates that you would get for them from multiple lenders.

Consider securing a rate-lock agreement that will fix the interest rate of the loan throughout the period of construction. This will protect your finances from fluctuations in the interest rate market while your home is built.

Sign the construction loan agreement once you are satisfied with the terms. With financing secured, you can begin building a home on your land. Expect to have to pay a higher interest rate and document your income more than you would otherwise because of your bad credit rating. In some cases, you may need to offer up the land that you own as security for the loan to get the lender to approve your application.