Here’s What You Need to Know About Financing a New Construction Investment

New construction investments have a lot of appeal in today’s competitive real estate market. With the US experiencing a shortage of somewhere between 4 and 6 million homes, new construction presents a lucrative opportunity for investors while also delivering much needed housing to underserved markets. Financing a new construction project is a different ball game from obtaining a mortgage on an existing home though. Along with having different requirements there are a variety of loan options, each with their own pros and cons. In this piece, we’ll cover the basics of new construction financing and the different loan types available to help you understand what’s best for your next investment.

Understanding New Construction Financing

A new construction loan has a few key differences from a traditional mortgage. Since mortgages are used for purchasing properties, all funds get distributed at the time of the purchase. In construction financing, while there is a total loan amount, funds are typically distributed in a series of disbursements called draws, each serving a different purpose. For example, framing, windows, electrical work, and plumbing will all get a dedicated percentage of the total loan. New construction loans also tend to have higher requirements, especially for credit, as there is no collateral to back the loan in the case of a default.

There are also various types of construction financing options to choose from. There are standalone construction loans as well as construction-to-permanent, and also private lenders that fund new construction investments. It will be important to compare all your options so you can find financing that’s a good fit for your project.

Construction-to-Permanent Loans

Construction-to-permanent loans are exactly what they sound like; these loans cover the initial cost of constructing a property, and then can be easily converted into a long-term financing program. The main advantage of going with this type of loan is there is only a single closing process the borrower has to go through, which can bring them savings. Lenders may also allow you to lock a rate in for the long-term loan ahead of time, and this can bring additional savings especially if you predict that interest rates will increase during construction.

Standalone Construction Loans

Standalone construction loans are essentially the opposite of construction-to-permanent options. They only cover the costs associated with the construction of a property, and will require a separate loan if you plan to hold on to the property afterwards. They can be a viable option if you’re planning to sell the property immediately after construction finishes, or if you expect that you’ll be able to secure better terms for permanent financing after this time. However, you should understand that this strategy can end up costing you more. You will still need to go through a second application process with its own set of closing costs and fees, and you might get stuck with a higher interest rate than you had initially anticipated.

Private Lending for New Construction

Another option you have is working with a private lender that operates in the new construction space. Private loans offer many benefits, including more flexible terms and a faster approval process, which can be important if time is a crucial factor. These loans also have a less stringent application process where your creditworthiness is less of a factor, and the financial potential of the investment is used to determine approval. When selecting a private lender, be sure to choose a reputable partner with a proven track record of delivering financing for real estate projects. Compare various loan options to secure the best terms for your investment.

Preparing for the Loan Application

As we mentioned, obtaining approval for a new construction loan can be difficult, since they tend to come with more requirements than standard real estate loans. It will be beneficial if you are well prepared before you start applying for financing. This will typically mean having a written plan for your project, along with a detailed budget, and income/bank statements. Most loans will require a good or excellent credit score, unless you are applying for a private loan. Your lender may also require that you have all plans and permits in place with your local jurisdiction beforehand, as this can be a lengthy step of the process before construction even begins. You should also expect to place a down payment of at least 20% as there is no collateral to back the loan.

Managing Your Loan During Construction

When construction does start on your project, you will need to maintain communication with your lender in order to ensure a smooth process. This is where having a thorough plan will prove to be useful, as draws will need to be made for each step of project. This is also where it pays to work with a reliable and communicative financing partner that can make sure funds are delivered on schedule. Many lenders require regular inspections throughout the course of the loan where they will monitor progress before disbursing funds. Some funds may be distributed once construction is completed as well. If you encounter any delays during construction, you should work with your lender to get through them or request an extension if needed.

RCN Capital

The easiest way to save on a new construction investment is to work with a trusted lender that can get you the best leverages and rates. RCN Capital lends to real estate professionals, commercial contractors & developers across the nation. We provide short-term fix & flip financing, long-term rental financing, and new construction financing for real estate investors. If you are an investor looking to acquire financing for a construction project, RCN Capital has competitive loan options available.