How Brokers Can Help Clients Secure New Construction Loans

Building a new home is always such a thrill -- it gives investors the chance to create a house according to their lifestyle, budget, and the needs of the potential future tenants. However, new home construction costs can add up quickly. Most investors lack the available cash to cover new construction in advance— that is where new construction loan financing steps in. Your job as a broker is to walk your clients through this process and assist them in obtaining the financing they require to turn their vision into a reality.

One thing that many new investors don't know when first thinking about constructing a property rather than purchasing one is that the types of loans are not the same as with a traditional mortgage. The process can be a little more complex at times.

If you've been left intimidated by the possibility of obtaining financing opportunities for new property construction, don't worry— we've put together a list of helpful tips to make your experience smoother.

What Are New Construction Loans?

New construction loans are short-term financing options that allow you to pay for the construction of a property from the ground up. They are usually utilized for:

• Building single-family homes.
• Developing multi-family properties.
• Constructing commercial buildings.

Key Features of New Construction Loans:

• Short-Term: Usually 6 to 18 months.
• Interest-Only Payments: Borrowers only pay interest during the construction phase.
• Draw Schedule: Funds are released in stages as the project progresses.
• Refinancing Option: Once construction is complete, borrowers can refinance into a traditional mortgage.

Why Brokers Choose New Construction Loans:

• They provide flexibility for clients with unique or custom projects.
• They allow clients to act quickly on opportunities.
• They can be tailored to fit specific project timelines and budgets.

By knowing the fundamentals of new construction loans, you can assist your clients in making the right choices and attaining their objectives.

Key Requirements for New Construction Loans

Obtaining a new construction loan is more complicated than a regular mortgage, but with proper preparation, your clients will have a better chance of approval. Here's what they need to know:

1. Start with a Detailed Plan

Lenders would like to have a clear and comprehensive plan for the property prior to approving a construction loan. This includes:

• Architectural Plans: Blueprints and designs for the property.
• Construction Timeline: A realistic schedule for completing the project.
• Budget: A detailed breakdown of costs, including materials, labor, and permits.

How Brokers Can Help:

• Work with your clients to create a comprehensive project plan.
• Use this plan to demonstrate the feasibility of the project to lenders.

2. Establish Strong Credit

Since construction loans are riskier than regular mortgages, lenders will thoroughly check your clients' credit record.

What Lenders Look For:

• Credit Score: A score of 680 or higher is typically required.
• Debt-to-Income Ratio: A lower ratio increases the chances of approval.
• Financial Stability: Lenders want to see a history of responsible financial management.

How Brokers Can Help:

• Advise your clients to check their credit reports for errors.
• Help them improve their credit score by paying down debts and avoiding new credit applications.

3. Prepare for a Larger Down Payment

Construction loans usually have a higher down payment requirement compared to regular mortgages—typically 20% to 25% of the entire project cost.

How Brokers Can Help:

• Help your clients calculate the down payment and plan accordingly.
• Explore alternative financing options for clients who may struggle with the upfront costs.

4. Hire an Experienced Builder

Lenders will insist on confirming whether the contractor is qualified enough to finish the job. This includes:

• Licenses and Insurance: Proof of professional credentials and coverage.
• References: Past clients who can vouch for the builder’s work.
• Financial Stability: A strong credit history and financial standing.

How Brokers Can Help:

• Recommend reputable builders in your area.
• Assist your clients in vetting potential builders and gathering the necessary documentation.

How New Construction Loans Differ from Traditional Mortgages

Understanding construction loans versus regular mortgages is central to guiding your clients into selecting the best finance option.

1. Purpose

• Construction Loans: Used to build new properties or renovate existing ones.
• Traditional Mortgages: Used to purchase already-built properties.

2. Repayment Structure

• Construction Loans: Interest-only payments during the construction phase, with the full balance due at the end of the term.
• Traditional Mortgages: Fixed monthly payments that include both principal and interest.

3. Collateral

• Construction Loans: The land and planned structure serve as collateral, but lenders view these as higher risk.
• Traditional Mortgages: The completed property serves as collateral, making it a lower-risk option for lenders.

How Brokers Can Help:

• Educate your clients on the differences between these loan types.
• Help them choose the right financing option based on their project and financial situation.

How to Apply for a New Construction Loan

The process of obtaining a new construction loan is slightly more complicated than a standard mortgage, but when properly prepared, your clients should be able to go through it easily. Below is what they should do.

1. Find the Right Lender

Not every lender provides construction loans, so be sure to discover one that excels in that form of funding.

How Brokers Can Help:

• Partner with lenders like RCN Capital who offer competitive construction loan options.
• Provide a list of questions to ask potential lenders, such as:
  • What are your interest rates and fees?
  • How quickly can you fund the loan?
  • Do you offer flexible repayment terms?

2. Gather Documentation

Lenders will demand accurate documentation to figure out your clients' financial circumstance and the potential of the endeavor.

What to Include:

• Property Details: Architectural plans, construction timeline, and budget.
• Financial Information: Bank statements, income verification, and credit reports.
• Builder Information: Licenses, insurance, and references.

How Brokers Can Help:

• Help your clients gather and organize the necessary documentation.
• Ensure all paperwork is accurate and complete to speed up the approval process.

3. Be Responsive and Communicative

Clear and timely communication is key to a smooth application process.

How Brokers Can Help:

• Act as the primary point of contact between your clients and the lender.
• Keep your clients informed and involved throughout the process.

New construction loans are a valuable tool for real estate investors, providing flexibility and access to opportunities that cannot be had through conventional financing. Educating yourself on the requirements and process of applying will enable you to assist your clients in obtaining the financing necessary to make their projects a reality.

Why Partner with RCN Capital for New Construction Loans?

At RCN Capital, we know the special needs of real estate investors—and the brokers that serve them. Here's why brokers prefer to work with us:

• Flexible Programs: From fix-and-flip financing to long-term rental funding, we provide solutions to suit your client's requirements.
• Fast Closings: We can close loans in as few as 10 business days, helping your clients move quickly on opportunities.
• Broker-Friendly: We value our relationships with brokers and offer competitive commissions, fast approvals, and dedicated support.

Whether your clients are building single-family homes, multi-family properties, or commercial buildings, RCN Capital has the financing solutions they need to succeed.Ready to take your brokerage to the next level? Connect with us today to discuss our real estate financing solutions and how we can help you grow your business.