Common Questions about New Construction Loans

For brokers helping their clients expand their single-family rental portfolios, new construction loans are a powerful tool. With the real estate market continuing to offer valuable opportunities, especially as economic conditions stabilize, it’s essential to understand how to position new construction financing as a solution for your clients.

To help you guide your clients effectively, here are answers to six common questions about new construction loans.

What Are Construction Loans?

A construction loan is a short-term, higher-interest loan designed to cover the costs of land, contractor labor, building materials, permits, and other project expenses. These loans are crucial for clients pursuing ground-up construction investments in developing markets.

What Types of Construction Loans Are Available?

Construction loans come in several types, each catering to different client needs:

• Construction-to-Permanent Loans: Funds construction and transitions to permanent mortgage financing upon project completion.
• Construction-Only Loans: Ideal for clients who prefer a separate financing solution for the build itself.
• FHA 203k Loans: Backed by the government, suitable for properties requiring substantial renovations.
• Owner-Builder Loans: For clients managing their own construction projects.

If your client is building an investment property or vacation home, additional considerations may apply.

Do Clients Need a Detailed Project Plan?

Absolutely. Lenders require detailed project plans as part of the loan application process. For a lender to approve a new construction loan, they require a plan so they understand what your client intends to do with the property and exactly what type of loan they will need. Encourage your clients to prepare comprehensive plans that include timelines, budgets, and scope of work. A well-prepared plan not only streamlines approvals but also helps your clients stay on track and complete their projects on time and efficiently.

What Happens If the Project Exceeds the Estimated Timeline?

Unfortunately, if a project takes longer than anticipated and your client needs to extend financing past the agreed timeline, your clients could be subject to loan extension fees and penalties. These fees vary by lender, so it’s wise to have this discussion upfront with your clients. Unforeseen delays, like weather-related interruptions, can occur, so having a buffer plan in place is always a good idea.

How Does Interest Work on Construction Loans?

Interest rates on construction loans function similarly to traditional loans, determined by the client's credit history and market conditions. Rates can be:

• Fixed: Remains consistent throughout the loan term.
• Adjustable: Varies over time based on the Federal Reserve’s market influence.

Educate your clients on how rate structures impact their financing options and overall costs.

What Percentage of Construction Funds Can Be Borrowed?

This largely depends on the lender and client’s experience. For RCN Capital’s New Construction Program:

• Up to 90% of the total loan-to-cost (LTC) can be borrowed.
• Up to 75% of the maximum loan-to-value (LTV) can be borrowed.

To secure higher percentages, ensure your client’s loan-to-ARV (after-repair value) ratio is at least 65%. Remind them to account for closing costs, loan fee structures, and underwriting requirements when calculating their financing needs.

RCN Capital | New Construction Loans for Brokers

RCN Capital specializes in flexible financing options for brokers and their clients. Our 12-24 month new construction loan program offers competitive rates starting at 10.99%.

Whether your clients are building properties for fix-and-flip projects or to hold them as long-term rentals, RCN Capital has tailored solutions to meet their needs. Partner with us today to streamline your clients' financing and take their real estate investments to the next level.

Contact us now to discuss your next new construction loan deal!