When considering building a new home instead of buying existing real estate, many professionals are attracted to the idea of customization and creating a property that exceeds its construction cost. New construction offers a chance to start with a blank slate, no surprises from outdated systems or unexpected deterioration.
If you’re entering the world of new construction financing, it’s crucial to be well informed about the process. This guide provides essential information on applying for a construction loan from a wholesale lending perspective, helping you avoid snags that could delay your clients’ projects.
A construction loan is a short-term, higher-interest loan used to cover the costs associated with building a new property. Unlike a traditional mortgage, where the entire loan amount is disbursed at the time of purchase, construction loans release funds in stages, known as "draws." These draws are scheduled according to the progress of the project and are allocated for items such as land acquisition, contractor labor, building materials, permits, and more.
There are several types of construction loans available:
Wholesale lenders, offering streamlined processes and competitive terms, can be a great resource when seeking construction financing. Their expertise can help guide you through the disbursement process and ensure your project remains on schedule.
Most construction loans are issued for a period of 12 to 18 months, although the duration depends on the projected completion date of your project. Lenders might offer flexibility by adjusting or extending the loan term, but it’s best to adhere to a strict schedule to avoid extension fees.
Due to the short-term nature of these loans, interest rates typically fall in the 7-9% range. However, you generally only make interest payments during the construction period, with the principal due at the end of the term. Each lender’s terms can vary, so it’s vital to review the specific conditions with your chosen financing partner. This ensures that the financing structure fits your project’s timeline and financial forecasts.
Construction loans are considered riskier by lenders because, until the project is completed, there isn’t an existing property to serve as collateral like in traditional mortgages. This is one reason why construction loans carry higher interest rates. Lenders will scrutinize your credit history and financial stability, often requesting bank statements, proof of income, and detailed information about your financial reserves.
When assessing your application, lenders also look at the project’s feasibility. They typically set limits on the loan-to-after repair value (ARV) at around 75% and on the total loan-to-cost (LTC) at approximately 90%. These guidelines ensure that the project has sufficient potential to be profitable, minimizing the risk to both you and the lender.
To improve your chances of approval, it’s essential to be prepared. Assemble a comprehensive plan that includes a detailed project budget, timelines, and all necessary permits. Wholesale lenders, known for their efficiency, may also provide additional resources or pre-approval processes to expedite your application.
Preparation is key to a smooth construction loan process. Before applying, compile a complete package of documentation that includes:
By presenting a well-organized application, you demonstrate to your lending partner that you’re prepared and serious about your project. This can significantly speed up the approval process and secure more favorable terms.
Construction loans often come with more stringent credit requirements compared to traditional loans. Lenders need assurance that you can manage the construction process and repay the loan upon project completion. Key factors include:
Wholesale lenders are typically well-versed in assessing these factors and can offer tailored solutions based on your unique financial profile and project details.
By focusing on detailed project plans, realistic budgets, and maintaining clear communication with your lender, you can avoid common pitfalls that lead to delays or additional costs. Wholesale lenders offer a robust alternative to traditional financing, providing faster approval, flexible terms, and the specialized support needed to keep your project on track.
If you’re ready to take the next step in building a custom property that reflects your vision and investment goals, partnering with a trusted lending partner can set you on the path to success. RCN Capital lends to real estate professionals, commercial contractors, developers, and small business owners across the nation. We offer short-term fix & flip financing, long-term rental financing, and new construction financing for real estate investors. If you’re looking to finance a new construction project, RCN Capital’s trusted team is ready to guide you every step of the way. Connect with us today to discuss your next construction deal and how our loan solutions can help you and your clients find success.