New Construction Loan Requirements: What Brokers Need to Know

As with any loan, when qualifying for a construction loan, you will need to meet some specific requirements. At first glance, getting approval for a new construction loan may seem similar to obtaining a mortgage, but getting approval to break ground on a new property is a bit more complicated. Requirements vary by lender and the type of construction loan a borrower is applying for.

This article will provide an overview of what the requirements for a construction loan are and what third-party originators, including mortgage brokers, private lenders, and affiliate partners, should keep in mind when guiding their clients through the process.

How Do New Construction Loans Work?

Usually, construction loans have variable rates that move up and down with the prime rate. Beyond that, construction loan rates are often higher than traditional loan rates. Consider this: with a traditional mortgage, a finished property is a collateral—if the borrower defaults, the lender can seize the home. However, with a construction loan, the lender doesn’t have that option available, so these loans are considered to be more risky for the lender. 

Since construction loans are used for projects that have a short timetable and are dependent on the completion of the project, borrowers must provide the prospective lender with a construction timeline as well as detailed plans and a realistic budget. 

Depending on the type of construction loan, the borrower might be able to convert the construction loan to a traditional mortgage once the home is built. This is known as a construction-to-permanent loan. If the loan is solely for the construction phase, the borrower might be required to get a separate mortgage designed to pay off the construction loan. For brokers and third-party originators, understanding these nuances is essential when advising clients on how to get approved for a construction loan.

New Construction Loan Requirements

When assisting clients with securing a new construction loan, here are the usual requirements to keep in mind:

Begin with a Plan

For a lender to approve a loan for new home construction, borrowers must create and present a detailed plan for the property, so that the lender has an idea of what the client intends to do with it and when. As a broker or wholesale partner, helping your clients prepare this documentation can improve their chances of approval.

If construction isn't starting immediately, the client may need a separate Lot Loan to purchase the land; However, if construction is set to begin right away, a construction loan is the appropriate option.

Established Credit Is Key

Construction loans tend to be riskier for lenders when compared with home loans because there is no finished structure to use as collateral. Obviously, 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. Brokers should encourage their clients to review their credit reports, correct any inaccuracies, and pay down existing debts to strengthen their application.

Debt-to-Income Ratio

For most lenders, a debt-to-income (DTI) ratio of 50% or lower is ideal. Exceptions can sometimes be made for borrowers with particularly strong financial profiles. Brokers can help clients calculate their DTI and address potential obstacles before applying.

Down Payment Considerations

Unlike traditional mortgages, which may allow for a 5% down payment, construction loans often require a 20-25% upfront investment. FHA loans, however, may require less down and can be a viable option for certain borrowers. Brokers can assist their clients in exploring programs and strategies for managing the higher initial costs.

Create a Repayment Plan

Construction loans usually require no payments or interest-only payments during the construction phase. Fully amortized principal and interest payments typically begin after construction is complete. Helping clients understand their repayment obligations ensures smoother loan management.

Work with an Experienced & Licensed Builder

Lenders will require proof of the builder's experience and their reliability, including professional licenses, insurance, and references. Brokers and wholesale partners can play a key role in connecting borrowers with reputable builders to streamline the vetting process.

Steps to Secure a Construction Loan

Brokers and wholesale partners should focus on making the client experience as simple as possible. Here’s a step-by-step guide to help borrowers navigate the loan process:

1. Pre-Approval: Contact a construction loan lender to receive pre-approval.
2. Find a Builder: Your clients should work with an experienced builder by signing a formal contract. The contract must contain a loan contingency which enables clients to cancel their agreement if they fail to secure financing.
3. Submit Documentation: Help clients file builder contracts and necessary underwriting documents including deeds and surveys to obtain lender approval.
4. Appraisal: Help your clients get a subject-to-completion appraisal of the proposed property.
5. Final Approval: The client will be able to start construction after the lender approves the loan. The lender will disburse funds in phases, inspecting progress at each stage.

By guiding your clients through these steps, you position yourself as a reliable partner in their journey to financing new construction projects.

RCN Capital | New Construction Loans

At RCN Capital, we recognize the unique role brokers and wholesale partners play in connecting borrowers with the right financing solutions. We aim to enable third-party originators with competitive loan choices and simplified processes for their clients.

The higher risks associated with construction loans require brokers to find trustworthy lenders who will maintain transparent and reliable financing services. RCN Capital provides:

• Flexible Loan Programs: We provide construction loans with 12-24 month terms which start at a rate of 10.99% to support diverse building projects.
• Dedicated Support: RCN Capital enables brokers, wholesale lenders, and affiliate partners to deliver seamless financings throughout the entire investment process.
• Nationwide Reach: Whether your clients are looking to fix and flip properties or build new ones, we offer tailored options across the country.

If you’re a mortgage broker, private lender, or affiliate partner looking to enhance your portfolio of services, RCN Capital is here to help you succeed. Connect with us today to explore how our new construction loan programs can meet your client's needs and grow your business.