Common Questions about New Construction Loans

There is great promise for real estate investors who want to build their single-family rental portfolios or engage in fix-and-flip projects. As the economy continues to recover from a worldwide pandemic, it is likely that the real estate market will continue to provide a variety of valuable opportunities. If you’re a real estate investor who wants to make the most of these opportunities, you’ll need to be prepared to apply for new construction loans or ground-up financing. Before you apply for these types of loans, it’s important to have the knowledge necessary to make well-informed decisions about any loan you take out. Continue reading to learn the answers to six common questions about new construction loans.

What are Construction Loans?

A construction loan is a short-term, higher-interest loan that can be used to cover the cost of land, contractor labor, building materials, permits and more.  

What types of construction loans are available?

There are several different types of construction loans. When most people think of construction loans, they often think of construction-to-permanent. Just like the name suggests, this type of loan provides the necessary funds to build the property as well as the ability to transition to permanent mortgage financing once the property is complete. New construction loans are often taken out assuming that the property will be the primary residence of the borrower; however, in some instances a vacation home or investment property requires additional considerations.

Other common construction loan options include construction-only, FHA 203(k), owner-builder and renovation loans. A renovation loan is designed for projects that are much smaller in terms of work and financing, while a construction-to-permanent loan is for projects that are large in scale and scope.

Do I need a detailed project plan?

When applying for any kind of loan, it’s important to have all your ducks in a row, which includes having a plan prepared. For a lender to approve your new construction loan, you’ll need a plan so the lender has an idea of what you intend to do with the property and what type of loan you need. If you’re ready to begin building right away, make sure to have a plan so you can apply for the construction loan right away too.

Will I be penalized if the project goes beyond the estimated timeline?

Unfortunately, if your project takes longer than anticipated and you need to extend financing past the agreed timeline, you could be subject to loan extension fees and penalties. The exact details will depend on the lender you go through— some lenders charge more in fees than others. Due to this, it’s important to carefully consider all the details before choosing your lender.

It’s wise to ask your lender about any extension fees and penalties in advance; after all, there are some delays that are impossible to predict (like interruptions due to inclement weather).

How does interest work on construction loans?

From an interest perspective, there isn’t much of a difference between construction loans and regular purchase loans. The interest that you pay is determined by your credit history and what the market is for interest rates, which is influenced by the Federal Reserve. Interest rates can either be fixed, where the interest remains the same for the life of the loan, or adjustable, which vary over time.

What percentage of construction funds can I borrow?

The answer to this question will vary depending on the lender you’re working with and your individual qualifications. In some cases, lenders may offer up to 90% of lot construction and purchase costs, while other may offer up to 100% of construction costs if you own the lot you’re building on. Remember, in order to qualify for these types of loan percentages, you need to have a loan to ARV (after-repair value) ratio of roughly 70%. When you’re determining your leverage options and calculating the amount of funds you’ll need to borrow, remember to consider expected closing costs, loan fee structures and how underwriting requirements apply.

RCN Capital | New Construction Loans

Here at RCN Capital, we offer a 12-24 month term program with rates starting at 7.99%.

RCN Capital lends to real estate professionals, commercial contractors, developers & small business owners throughout the country. Whether you are looking to fix & flip properties or hold properties for rental income, RCN has flexible options that are suited to your needs. If you are an investor looking to finance a new construction, RCN Capital has competitive loan options available. Connect with us today to discuss your next new construction loan deal.