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The construction of a new property is always an exciting experience — it offers investors the opportunity to design a property based on their lifestyle, budget, and the needs of their prospective future tenants. Yet, it should come as no surprise that new construction costs can add up quickly. Most investors do not have the cash on hand to pay for new construction out of pocket— this is where new construction loan financing comes into play.
One fact many new investors do not realize when first considering the idea of building a property instead of buying one is that the loan types are different than those of a traditional mortgage. Actually, the process can be a bit more complicated at times.
If the prospect of acquiring financing options for the construction of new property has left you feeling overwhelmed, fear not— our team of professionals has compiled a list of useful advice to help simplify your experience.
What are the Requirements for New Construction Loans?
If you are seeking a new construction loans, the usual requirements are as follows:
Begin with a Plan
For a lender to approve the purchase of land for new home construction, you will need to create and present a detailed plan for the property, so that the lender has an idea of what you intend to do with it and when. Your plan for the property ultimately determines the type of loan you will need. It may be a while before you can start construction on the new property, in which case you likely would need a Lot Loan to purchase the land; however, if you are ready to begin building right away, you can take out a construction loan.
Make Sure You Have Established Credit
Construction loans tend to be riskier for lenders when compared with home loans because there is no finished structure to use as collateral. Obviously, your credit record is not the only criteria that lenders will observe to determine whether they will approve the loan, however, they will certainly examine it very carefully. Therefore, you should check your reports to look for any inaccuracies, as well as paying down your existing debts to the greatest extent possible.
Consider the Down Payment
Your down payment will inevitably vary based on the loan type. While you would be able to put 5% down on a conventional mortgage, a construction loan would require at least 20% upfront. Be sure to ask your lender how to get a construction loan with no money down. Down payments for FHA Loans start at around 3.5%.
Hire an Experienced & Licensed Builder
Your lender will want to verify that the builder is experienced enough to pay suppliers and complete the construction project. The vetting process requires your builder to provide professional licenses, proof of insurance and references detailing payment history. The lender will also often review the builder’s credit rating and financial standing.
Typically, borrowers who want a construction loan instead of traditional mortgage will face a higher standard— this is due to the fact that the loan has no collateral since the property hasn’t been built yet. In some cases, lenders view construction loans to be risky, meaning that qualifying can be difficult and your interest rate may be higher than on a traditional mortgage.
What’s The Difference Between A Construction Loan And A Home Loan?
Construction loans and home loans have different uses and the approval requirements are slightly different for each. Construction loans are used to build new structures or renovate existing properties, while a home loan is just a standard traditional mortgage. Each type of financing requires a credit check and the disclosure of other financial information; however, a new construction loan will also require the project plans to be approved before the loan is issued.
Furthermore, construction loans are only used for the duration of the project. Borrowers who need construction loans will often refinance the property after the project is completed and enter a more traditional loan.
What’s The Difference Between A Construction Loan And A Renovation Loan?
The type of project determines the difference between construction loans and renovation loans. Construction loans are used for new properties with defined project plans. On the other hand, renovation loans for investors are used to purchase fixer-uppers or to renovate existing properties. These loans can be used for cosmetic and structural fixes, like insulating a house or upgrading a kitchen.
RCN Capital
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 for financing for apartment investing, RCN Capital has competitive loan options available. Connect with us today to discuss your next new construction loan deal.