Construction Loan & Bankruptcy Woes

[Mgilbert8605]

Hi, All. Last month, I finally hit my 4 year anniversary for my chapter 7 bankruptcy. I bought land earlier this year, with hopes of doing a custom home build. When I got a contingent pre-approval back then (to determine how much I would qualify for, before buying land) I was approved for an appropriate amount. The rising interest rates are making it more challenging, now that I can actually apply for the loan. An added layer of complication is that most builders/GCs are switching from fixed price to cost plus payment models, in my area.

Most lenders who I’ve contacted won’t finance cost plus loans. Based on the recommendation of someone who was able to get lending using a cost plus builder, I called Truist. The loan officer rocked my world with disappointment, when he told me that I won’t qualify for a construction loan. He told me that for conventional construction loans, the waiting period is SEVEN years, instead of 4, after a chapter 7. He was the first lender who I’ve heard that from. I figured that I would reach out to you guys first, before calling more lenders. Is this true?

[ShanetheMortgageMan]

Most construction loan programs have varying guidelines, there is no "standard" that all lenders go by.  The most popular construction loans out there are construction-to-perm loans that are based on Fannie Mae, Freddie Mac, FHA or VA underwriting guidelines but those are all for fixed cost builders.  Cost+ construction loans have steeper qualifying requirements due to the riskier type of transaction, lower loan-to-value (LTV), liquid reserve requirements and strong credit could all be needed.  You'll just need to call up local banks and ask "Does your construction loan allow cost+ builders?" and "Does it allow for a Ch 7 BK discharge that is 4 years old?".

For you to have more construction loan options you could ask the builder if there is a fixed price they'd agree to do it for, often this will be a higher figure than if you go the cost plus route since the builder needs to overestimate to make sure they aren't going to get short changed if their supply costs increase.  In that situation you shouldn't have much trouble finding a lender OK with your Ch 7 BK seasoning, but it could very well be worthwhile to put in the effort to try and find the construction lender who'd be OK with your credit situation & doing a cost+ build.

[Mgilbert8605]

This gives me hope. I was worried that I would have to sell my land and rejoin the bidding wars of this house market, to find an existing home. Thank you!