Mistakes to Avoid with New Construction Loans

Applying for a new construction loan is a trusted method to reduce the financial burden of building a new property, making major renovations, or developing new rental units in line with your financial plans.

Unlike mortgage loans, new construction loans are short-term financing agreements that provide borrowers with upfront cash to buy land and build on, or to make significant additions to an existing property. Fortunately, construction loans don’t penalize borrowers for early repayment of loans— these types of loans will only charge you interest on the amount used during construction.

When applying for a new construction loan, there’s always the possibility that you will make a mistake that can cost you the loan approval. To err on the side of caution, you should seek to avoid these common mistakes throughout the entire loan application process.

Not Doing Your Research

In the world of rental properties, you can't blame your dog for eating your homework! If you skimp on your research, you're only fooling yourself. We get that extensive research can feel a bit tedious, especially if you've been considering multiple options, but it’s essential if you want toavoid a bad investment property.

Neglecting to Negotiate with Builders

Building a new property isn’t like buying an existing one. Builders have their costs, so there’s little room for negotiation, right? It’s a common misconception in real estate, but it isn’t quite true. Builders have room for negotiation and agreeing to their price right away could cost you thousands. Of course, you still want to be respectful when discussing their pricing structure. Whether you ask for a better price outright, or negotiate for better incentives or allowances, don’t accept that first price at face value.

Working with Your Builder’s Lender

Almost all builders have a “preferred lender,” where they send most of their buyers. If that lender offers the best rates and incentives, they very well might be suitable for the job. However, it’s beneficial to shop around for lenders that will offer the best rates, especially if you already have a lender you have worked with in the past that you like. Trying to keep track of your build budget can have you wishing you’d paid better attention in math class, but as you add up receipts and make choices, don’t forget to keep the bigger picture in mind. Paying for a new property doesn’t only happen during the build process, but for years to come. Make smart choices now and you’ll be paid in peace of mind later.

Being Unprepared

Borrowers should have their financial documentation in order long before they apply for a loan— or even before they put a property under contract. A borrower who approaches a lender with a complete loan package in a timely manner builds confidence early in the process.

Last Minute Changes to Your Credit

Changes to your financial status before loan closing means things like adding more debt to your debt-to-income ratio, applying for other credit in the meantime, and similar issues. Missed payments, late payments, and similar problems can also present an issue.

If your debt-to-income ratio isn’t ideal, the addition of new credit will definitely affect your potential to close. FHA loan rules, lender standards, and other requirements may all factor into the decision on how to handle such contingencies. The best advice here is not to apply for a new credit card or open other types of credit accounts even if you feel confident your closing date is set in stone. Your closing date is subject to change at all times due to lender needs, unforeseen problems, natural disasters, or other variables.

As you may have realized by now, acquiring a new construction loan requires diligence and careful thought. However, by following these tips you should be able to avoid most of the common mistakes and ensure success with your project.

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 to finance a new construction, RCN Capital has competitive loan options available.Connect with us todayto discuss your next new construction loan deal.