One of the benefits of construction financing is that most of it is equity based, so repayment ability or debt servicing assessments are not as important as with other types of longer term mortgages.
So if you have bad credit, but the rest of the project makes sense from an equity, budgeting, builder, project management, and exit strategy perspective, a bad credit construction loan still can be arranged.
Good credit is also most important to banks and other institutional lenders. In the world of construction financing, only about 10% of construction loans come from these sources. The vast majority of construction loans are issued by private mortgage lenders.
But its also not fair to say that all private lenders don’t care about your credit. Some privates will take more of an interest in it than others. For those that do inspect your credit report, the primary thing they’re looking for is if you’re a habitual late payer and/or regularly in collections on your credit accounts. No one likes to lend money to someone who looks like they may be difficult to work with or will not honor their commitment on a timely basis.
For the privates that can see past bad credit where there are lots of lates and collections, but the construction financing deal is otherwise strong, expect the rates and fees to be higher and the lender’s patience to be lower when any issues arise.
Bad credit that has been caused by explainable events, especially ones from the not so recent past, may have no bearing at all on a private lender’s decision to fund the project or not. The key is to thoroughly understand exactly what is being reported on your credit report, not just your credit score. If you can effectively explain any and all negatives, or provide supporting documentation to so items reported in error, then you stand a good chance to be seriously considered for any bad credit construction loans you may apply for.
If you’ve got a credit score under 650 and need a construction loan, give me a call so we can review your requirements and your credit profile and see what private mortgage financing options may be available to you.