The housing market is still experiencing a shortage of inventory, with houses selling rapidly, usually over the asking price. For investors and homebuyers, this means that it can be difficult to find the perfect property. As a broker or wholesale lending partner, this is a chance to guide your clients toward a different solution: financing a new property build.
Whether working with real estate investors or smaller private lenders, new construction can offer attractive returns and a competitive edge in the market. In this guide, we’ll explore how construction loans work and how you, as a mortgage broker or lending partner, can assist your clients in securing financing for a new construction project.
What is a Construction Loan?
Before walking your clients through the financing process, it's crucial to grasp the basic principles of construction loans. Construction loans are short-term in nature, usually made for a period of 12-18 months, and they tend to carry higher interest rates because of this. Construction loans differ from normal mortgages in that they pay for land, labor, building supplies, and various other expenses on new construction ventures.
There are several types of construction loans available, each catering to different needs:
- Construction-to-Permanent Loans: These loans transition into a long-term mortgage once construction is complete, making them a great option for clients who plan to rent or occupy the property after completion.
- Construction-Only Loans: These loans cover only the construction costs and must be paid off upon project completion, often through a mortgage refinance or property sale.
- Renovation Loans: These loans are for existing properties requiring significant upgrades or expansions, often utilized when adding value to a property before resale or rental.
Understanding these options enables you to provide tailored recommendations to your clients, ensuring they secure the best financing solution for their investment goals.
Loan Terms and Conditions
Construction loans have certain conditions that are known to brokers, who must advise their clients on the same. The tenure of the loan would be between 12-18 months, with a strict adherence to construction schedules. Extensions are sometimes provided by lenders, but at additional cost.
Unlike traditional mortgages, construction loans usually call for interest-only payments during the construction period. The loan principal is payable at maturity, commonly through property sales or refinancing to a permanent mortgage. Varying conditions will be present with different lenders, so it is important to discuss matters clearly with your clients and pair them with lenders that support their financial plan.
Planning and Budgeting for a Construction Loan
A well-prepared loan application will enhance the chances of approval. As a broker, it is important to walk your clients through preparing a comprehensive plan and budget. Lenders need a good construction schedule and a clear budget to make the project a success.
Construction loans are paid out in installments, or draws, which are distributed at different phases of the project. This systematic disbursement reduces risk for lenders and helps ensure that funds are being properly utilized. A clear budget simplifies the loan process and avoids unnecessary delays or shortages of funding.
The Role of a Mortgage Broker in Securing Construction Loans
As a lending partner or mortgage broker, your position plays an important role in bringing customers in contact with appropriate financing solutions. With your business experience in the industry, you can become an important resource for small private lenders, real estate investors, and affiliate partners.
Here’s how you can add value:
- Market Knowledge: Understanding lender guidelines, interest rates, and approval criteria allows you to match clients with suitable financing options.
- Loan Structuring: Advising clients on loan structuring, whether through interest-only periods, extension terms, or refinancing strategies.
- Lender Relationships: Partnering with reliable lenders ensures access to competitive rates and flexible terms for your clients.
- Guidance and Support: Helping clients navigate the complexities of construction financing, from application to final approval.
By positioning yourself as an expert in new construction financing, you can strengthen your client relationships and drive more business through referrals and repeat clients.
Finding the Right Lender for Your Clients
After your clients are equipped with a sound plan, you need to find them the correct lender. It is best that you work with experienced lenders that have experience with construction loans. Lenders familiar with the particular challenges of new construction can give you more favorable loan terms and advice.
When evaluating lenders, consider:
- Their experience with construction loans
- Their approval process and turnaround times
- Available loan programs and flexibility in terms
- Their ability to offer tailored solutions for various client needs
By working with lenders that provide competitive rates and favorable terms, you can help your clients maximize their investment potential.
RCN Capital: Your Partner in Construction Financing
RCN Capital is dedicated to partnering with commercial mortgage professionals, mortgage brokers, private lenders, and referral partners to supply flexible and competitive new construction financing options. We are well aware of the intricacies of construction lending and are dedicated to close collaboration with our wholesale lending partners in order to provide flawless transactions to their customers.
- Competitive loan programs tailored for new construction financing
- Fast and efficient approval processes to keep projects on track
- Dedicated broker support to help you close more deals
- Strong industry expertise to guide you through every step of the financing process
If you’re a broker looking to provide your clients with top-tier construction financing options, RCN Capital is here to help. Contact us today to learn more about our partnership opportunities and how we can support your business.