Should you apply for an owner-builder loan or a construction-to-permanent loan?
Whether you’re a homeowner looking to construct a home from scratch or a new builder who’s looking to secure the right construction financing from private money lenders, this blog is the ultimate guide for you.
Before we uncover the different types of construction loans, we’ll delve deep into what construction loans are, who should apply for them, and how builders can qualify for these short-term loans.
Construction Loans: How do they work?
Construction loans are extended to borrowers who want to complete the construction of offices, homes, and other properties on a parcel of land. These short-term loans are extended to borrowers as a line of credit loan that’s released in sync with the construction progress and milestones. Since construction loans are short-term and scheduled to last up to a year or sometimes more, the borrower can obtain long-term funding later.
Moreover, a borrower can refinance the construction loan into a permanent mortgage or take out a new loan to pay off the construction loan.
3 Types of construction loans
Construction loans aren’t a one size fits all!
We explain the different types of construction loans used by either builders, buyers, and developers to execute their construction projects successfully.
Don’t want to go through the hassle of finding a mortgage after you’re done constructing your home? A Construction-to-permanent loan might just be the right solution for you!
This specific construction loan allows developers and builders to finance the property’s construction until its completion. Once the building has been completed, the borrowers can convert this loan into a fixed-rate mortgage and save the closing costs on their construction project.
This short-term loan is ideal for borrowers that are confident about the high-value sale of the completed project but only need immediate cash flow to initiate the construction.
Once the construction has been completed, the borrower will need to repay the entire loan by the end of the loan term or refinance it into a mortgage.
Usually, borrowers who apply for a construction-only loan need to submit two applications and require two closings. The first process is to secure the construction-only loan before the completion of the house. The second application and closing process are required to refinance the building project and secure a mortgage for it.
Renovation construction loans
Maybe you just bought a complete house but feel that it needs some renovation and fixing to do. Homeowners and house flippers can take up a renovation construction loan from their lender. This type of loan is extended to developers, house buyers, and house flippers who want to carry out extensive renovation projects. The borrowers can use the funds from renovation construction loans to finance the purchase of a new home and cover the costs of renovations the new property needs.
Lenders specify the loan amount based on the expected value of the house after the renovations have been completed.
Do you qualify for construction loans?
Before you embark on a search for a construction loan lender, know if you qualify for one or not.
Most lending firms will require builders or developers to present approvals and piles of paperwork to approve the construction loan.
Since construction loans are high-risk financing solutions, the lender might need to review your credit score. While a 680 credit score is considered decent, a credit score higher than 720 will instantly get you approved for the construction loan. Moreover, the lender will need to look at the borrower’s history and ideally have a low debt-to-income ratio to qualify for the construction loan.
If you need to get that construction loan as quickly as possible, you’ll need to make a hefty down payment!
A down payment higher than 20% will assure the lender of your genuine interest and reduce the risk for their investment.
A comprehensive construction plan
A carefully crafted construction plan can help borrowers secure a construction loan quickly.
Before you head out to apply for a construction loan, ensure that you have a comprehensive plan and specifications of the building.
Compile the blueprints, illustrated images, budget, resources, and computer-aided designs that show the complete requirements for a construction project.
A land appraisal
A lender might want to get an appraisal performed to evaluate the land.
They’ll need to perform their own appraisal of the land you have, the building that’s being constructed, and the anticipated value of the completed property. This appraisal might determine the value of the construction loan being extended to the borrower.
How to find the right construction loan lender?
While construction loans can come with high-interest rates and larger down payments, this shouldn’t prevent you from taking out a loan and building the property of your dreams. Here’s how borrowers can choose the right construction loan lender and take out a short-term loan for their obligations.
Borrowers should get in touch with a lending consultant and pose a few questions like;
- the type of construction loans that they offer
- their interest rates, whether they’re fixed or variable
- if they charge any closing costs such as appraisal fees, attorney’s fees, or inspection fees
- How does the lending firm extend construction draws? Do they carry out construction draws after reaching every construction milestone or as a percentage of the completion?
- How can the consultants help with the construction budget projections?
Popping these few questions will let you know if you should opt for the first lender or further scan the markets to find the right one.
A private money lender can help you secure a short-term construction loan in no time! At Commercial Private Equity, clients can get in touch with our consultants and seek out construction loans according to their financial obligations.