The real estate market is in need of homes now more than ever, and savvy investors have started to take notice. New construction projects can be great investments, but traditional lenders can’t keep up with fast changing market conditions. This is where flexible ground-up construction financing from private lenders can create more opportunities for investors. Although these deals are more complex, the brokers and lending partners who offer these programs can provide additional value to their clients and tap in to a new stream of business from construction-focused investors.
Continue reading for our guide on new construction financing, and how brokers can utilize these programs to grow their lending businesses.
New construction loans provide financing for the materials and labor used for building a property. These are separate from lot loans, which are used to purchase the land itself. New construction loans are structured around a defined construction timeline and budget, so getting these items in order is crucial before submitting a loan application. These loans are shorter in duration, normally ranging from 12 to 24 months, and funds are disbursed in a series of payment called draws rather than in a lump sum at closing. Loans come in two varieties: construction-to-permanent, which can easily be converted to a long-term financing structure after closing, and construction-only, which is more suitable if the investor plans to sell once the property is built.
Unlike with a conventional mortgage, where there is already a property that acts as collateral to back the loan, new construction underwriting has to be more in depth. Lenders will want to review construction plans, the budget, and the overall feasibility of the project as an investment. They will also closely examine the borrower’s experience, since any previously completed construction or rehab projects can help with the strength of an application. Permits and builder information may also be required, but investors should already have these plans in motion when applying to reduce downtime before the project can begin.
Typically, construction and rehab loan funds are not disbursed to borrowers in a single payment, but rather in a series of payments that are assigned to specific milestones or portions of the project. Borrowers must submit a draw request when work is completed, then the work gets verified, and only then can funds be distributed. This process ensures that work is progressing smoothly, and it can also help reduce holding costs, since interest doesn’t get charged on withheld funds. It does mean, however, that the borrower needs to plan for paying contractors and covering other expenses to accommodate this structure. For brokers, having this conversation early with your client can help them plan accordingly and prevent funding gaps or unnecessary delays during construction.
There are a few key factors that lenders will be looking for when determining approval for a new construction loan. As mentioned, the borrower’s experience plays a major role in underwriting. Previous construction or renovation experience can lead to easier approvals and more favorable financing terms. Lenders will also want to see a detailed construction budget and a timeline that’s feasible given the scope of the project. This shows preparedness on the part of the borrower and can help create a stronger application. Ideally, the borrower should also provide a written exit strategy that’s supported by market data such as comparable sales (or rentals) from the same area.
Understanding the important numbers and how they might change with different borrower profiles allows you to provide a more tailored experience for clients.
You can provide more value to clients by utilizing your expertise to help them have smoother and more profitable deals. First, encourage them to get all documents prepped early, including plans, budgets, builder information, and income verification. Watch for unrealistic budgets or projects that aren’t supported by market data. Help your clients understand the draw structure of these loans, and how to stay on top of draws to keep cash flowing during construction. You can also help them plan better exits and guide them to strategies that align with market conditions to maximize returns.
For real estate brokers and lending partners, new construction financing can serve as the foundation of a strong client relationship that leads to future business. These same investors often go on to require long-term financing, refinance loans, or they’ll reinvest the funds from a sale into another project. If you want to build better relationships with these clients, you should strive to become a key resource on their team rather than just a source of capital. Your guidance and expertise can help differentiate you from the competition and become an investor’s go-to financing partner.
Your ability to provide clients with a good experience also depends on your chosen lending partner. Your chosen lender should have a proven track record of funding new construction deals, and they should prioritize speed and communication in the processes. The lenders that go above and beyond will offer additional resources such as educational and marketing materials that can help brokers navigate more complex deals and grow their businesses.
If you want to provide your clients with a stellar lending experience, partner with a lender that has a proven track record in the real estate investing space. RCN Capital lends to real estate professionals, commercial contractors, developers, and small business owners across the nation. We provide short-term fix & flip financing, long-term rental financing, and new construction financing for real estate investors and lending partners. If you are looking to offer construction financing to your clients, RCN Capital has competitive loan options and an award-winning broker referral program available to partners.