Pros and Cons of New Construction Loans: A Guide for Brokers

When it comes to investing in property, there are many options these days. Conventionally, people choose to invest in a home that is already built, especially if it’s their first one. On the other hand, building your own home can be a very exciting venture. There are many benefits to building a house from the ground up, but that’s not to say it doesn’t come with some hurdles.

Luckily, there is financing available for those looking to start construction. For brokers, understanding the ins and outs of new construction loans is crucial when guiding clients toward financing solutions. A construction loan is generally a short-term loan that finances the cost of building or rehabilitating a home. So, whether your project involves ground-up construction, or renovating an existing structure, a construction loan will help you finance what you need along the way.

By becoming well-versed in new construction loans, you can add significant value to your partnerships and foster long-term client relationships. We’ve put together some pros and cons so you can have a better understanding of what the loan entails.

What Are New Construction Loans?

New construction loans are particular kinds of short-term financing solutions that are intended for the construction or renovation of houses. These loans are not the same as conventional home financing, and instead they provide versatility by releasing funds in stages throughout construction. Unlike most other forms of financing which are secured by a finished property, construction loans are based on the project itself, requiring detailed plans, budgets, and timelines.

For brokers, it is important to know how these loans are structured, their advantages and disadvantages, and how they can fit into your client’s needs. Whether your client is an investor or a small business person, knowing the details of how to apply for a construction loan and explaining construction loan interest payments can make all the difference.

Key Takeaways for Brokers:

• Growing Market Opportunities: The U.S. construction market is projected to grow at a CAGR of 4.8% from 2023 to 2030, opening up new opportunities for brokers to assist clients in capitalizing on this growth.
• Higher Interest Rates Reflect Higher Risks: Construction loans are usually more expensive than conventional loans because there is no collateral during the construction of the loan. Interest rates are normally between 8% and 14% above normal home mortgage rates.
• Eligibility is Stringent: Borrowers must meet stringent requirements, including a credit score of 650+ and a down payment of at least 20%. As a broker, guiding clients through these requirements can streamline approvals.
• Flexibility is Key: With 67% of borrowers favoring lenders offering flexible terms, brokers can differentiate themselves by connecting clients with adaptable financing solutions tailored to their projects.
• Interest-Only Payments During Construction: Many construction loans offer interest-only payments during the build, which can alleviate financial pressure on borrowers and help them manage cash flow.
• Higher Client Satisfaction Through Expertise: Borrowers who worked with informed brokers reported a 35% higher satisfaction rate with their loan experience, emphasizing the importance of brokers’ knowledge and guidance.

Let’s explore the pros and cons of new construction loans, specifically from a broker’s perspective, to help you better position these products to your wholesale audience.

Pros of New Construction Loans

#1: Flexible Terms Tailored to Projects

The major strength of construction loans for home renovation or ground-up projects is that they are flexible. Many lenders will demand construction plans, timelines, and costs from the borrower as a basis for loan approval. This may appear to be a great deal of work initially, but it allows brokers to match up loan terms with the requirements of the project. Such an approach can assist you in making an individual approach to clients and guarantee they will remain compliant.

#2: Interest-Only Payments During Construction

The other advantage of new construction loans is that the borrowers are often allowed to make construction loan interest payments only during the construction phase. The principal amount only becomes due once the construction is over. This structure may help your clients greatly by giving them more cash in the initial stages of their project.

When acting as a broker, it is possible to promote this as a way to bring more benefits to your partners and their clients in the form of new construction loans. When discussing new construction loan interest rates, describe how interest-only payments give developers and investors some space, which makes these loans suitable even for clients with a limited amount of money.

#3: Transitioning to Permanent Financing

Many construction loans are structured to transition seamlessly into permanent financing once the project is complete. This means your clients can avoid the hassle of reapplying for a traditional loan. Instead, they can roll over their construction loan into a permanent mortgage with terms that match their financial goals.

For brokers, this feature can be a powerful tool to attract clients. Highlight the long-term benefits and emphasize the convenience this structure provides for both lenders and borrowers.

#4: Compliance and Structure Provide Stability

Because lenders depend on the completion of the project for the borrower to pay the loan back, they can be stricter when it comes to providing a construction plan. This involves getting specifics from your contractors about dates, materials, workers, methods, etc. for the project. However, having strict guidelines can help your clients get the job done on schedule and within your budget.

Brokers can present this as an advantage, demonstrating how the loan’s structure supports successful project completion.

Cons of New Construction Loans

#1: Higher Interest Rates and Risk

Compared to conventional loans, loan interest rates for construction financing are usually higher. As the mentioned loans are not backed by a finished property, the risks for the lenders are much higher, and this is mirrored in the rates. Brokers should be very clear with their clients on this aspect as they show how these rates work to capture the risks that are associated with construction projects.

If brokers tackle this challenge ahead of time, they can show their value by explaining to clients what they are getting into. When describing what the interest rate is on a construction loan, you should compare it with the traditional forms of financing to help the clients understand the situation better.

#2: Stringent Qualification Requirements

Construction loans are not handed out easily. Borrowers normally require good credit histories, large down payments, and well-developed project profiles. This may pose a challenge to some, but brokers can make it a virtue by explaining to them the process of how to get a construction loan and setting realistic expectations.

For wholesale partners, it is recommended to focus on the screening of the clients who are financially and organizationally ready. This is something that your expertise can help with and also increase loan approval rates.

How Brokers Can Leverage Construction Loans

It is for this reason that brokers have a great chance to become a reliable guide in the construction loan vs home loan discussion. If these differences are understood in detail, it is possible to suggest the right choice to your clients and gain trust among your wholesale contacts.

You might consider inviting your clients to online seminars or developing materials that will help them understand why new construction loans are beneficial. This helps make you an industry expert and also allows you to build your networks.

Strategies for Partnering with Lenders

It’s possible to turn problems into win-win scenarios for clients and brokers who focus on construction loans. By collaborating with a trusted lender like RCN Capital, you can offer your clients competitive rates and tailored solutions. Highlight programs like RCN’s 12-24 month term loan, which includes renovation financing options with rates starting at 9.99%.

Why Choose RCN Capital for Ground Up Construction Loans?

Here at RCN Capital, we pride ourselves on offering brokers and our wholesale partners the best construction loan programs. Our interest rate begins from 10.99% and we offer competitive, flexible terms depending on the type of construction loan the client wants, whether it is construction-to-permanent or construction only. Our programs are designed with your clients in mind, offering:

• Interest-only payments during the construction phase.
• Seamless transitions to permanent financing.
• Expert support at every step of the process.

When you do business with us, you will be able to access reliable sources of financing that enhance the credibility of your clients.

The Bottom Line for Brokers

New construction loans present substantial potential for brokers to grow their offerings and help borrowers. Of course, these loans are not without their difficulties, but there are reasons why so many people find such loans a good idea – the benefits of flexible terms, low interest-only payments, and strongly structured guidelines are not easy to ignore.

By understanding the nuances of how to apply for a construction loan you can position yourself as a go-to resource for your clients. Use this knowledge to build a better network and expand your business in 2025 and in the future.

Want to provide your clients with the best construction financing? Get in touch with RCN Capital today to learn more about our programs and how we can assist you in achieving your goal.