Like some standard mortgage loans for an existing home, you will need to complete an application document so the bank can determine how much money you can borrow for land, materials, labor and other related expenses that will surely come up. The bank will qualify you for the final mortgage, and at the same time will determine if you qualify for construction loan financing or another type of loan. The bank will determine what kind of construction loan you qualify for based on several items, such as your debt to income, down payment your applying, cash on hand, your home equity and credit scores. Banks will get this information from the major credit bureaus, including Trans Union and Experian. Those scores range from the 710-820's for the best borrowers, the mid 600's for average borrowers, and into the 500's for those with a credit history not great, but may still qualify. They will also consider the amount of money you have for a down payment. When you are looking for a construction loan, you will come up with an interest rate for the loan you use to build your home, and an interest rate for the final mortgage.

Example of this would be if your construction loan interest rate may be 8.7% for 12 months, and then convert into a 30-year conventional mortgage at 6.5% interest for your end loan. The higher interest rate on the construction side of the loan reflects the higher risk the bank is taking, because the house is not yet finished. Occasionally banks offer ARM or adjustable mortgages, that will extend across the construction loan.

Interest rate is just one part of borrowing money from banks. Although banks charge you for processing fees. These fees can be set up in many different ways. One way to understand this is by reviewing the APR, or annual percentage rate. This amount is always higher than the interest rate at which you are borrowing money, because it figured in your effective interest rate over the life of the loan, taking into account other fees you paid for the loan.

When making these important decisions it's very important to understand what's included in your loan and the fees involved. Once you obtain your construction loan and begin building your dream home, you will need to manage the loan the bank has provided for you. The bank will also provide additional funds at the end for land and any additional material and labor expenses that might come up.