Since there are numerous financing options available to today’s real estate investors, it can be difficult to make the appropriate decision for your next venture. When you’re building a new investment property, one option worth considering is a construction loan.
Renovation or construction loans for investment properties are great since they almost always allow the investor to customize their space/property. Anyone interested in new construction or an extensive renovation should consider this as a viable financing option. Continue reading to learn a few new construction loan tips to help you throughout the process.
New Construction Loan Tips
Begin with a Plan
For a lender to approve the purchase of land for new home construction, you will need to create and present a detailed plan for the property, so that the lender has an idea of what you intend to do with it and when. Your plan for the property ultimately determines the type of loan you will need. It may take some time before you can start construction on the new property, and first you may need a Lot Loan to purchase the land; however, if you are ready to begin building right away, you can take out a construction loan.
Consider the Types of Loans Available
There are several different types of construction loans. When most people think of construction loans, they often think of the “construction-to-permanent” option. Just like the name suggests, this type of loan provides the necessary funds to build the property as well as the ability to transition to permanent mortgage financing once the property is complete. New construction loans are often taken out assuming that the property will be the primary residence of the borrower; however, in some instances a vacation home or investment property requires additional considerations.
Other common construction loan options include construction-only, FHA 203k, owner-builder and renovation loans. A renovation loan is designed for projects that are much smaller in terms of work and financing, while a construction-to-permanent loan is for projects that are large in scale and scope.
Do You Have Established Credit?
Construction loans tend to be riskier for lenders when compared with home loans because there is no finished structure to use as collateral. Obviously, your 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. Therefore, you should check your reports to look for any inaccuracies, as well as paying down your existing debts to the greatest extent possible.
Determine the percentage of construction funds you can borrow
The percentage of construction funds you can borrow will vary depending on the lender you’re working with and your individual qualifications. In some cases, lenders may offer up to 90% of lot construction and purchase costs, while other may offer up to 100% of construction costs if you own the lot you’re building on. Remember, in order to qualify for these types of loan percentages, you need to have a loan-to-ARV (after repair value) ratio of roughly 70%. When you’re determining your leverage options and calculating the amount of funds you’ll need to borrow, remember to consider expected closing costs, loan fee structures and how underwriting requirements apply.
Finding a Reputable Construction Loan Lender
Because construction loans are a bit more complex than a standard mortgage, and there are different options to choose from, it’s a good idea to find a reputable lender that isn’t new to the construction lending process. Like many big financial decisions, it’s important to shop around and compare construction loan rates, terms, and down payment requirements to ensure you’re getting the best deal suited for your needs.
RCN Capital | New Construction Loans
Here at RCN Capital, we offer a 12-24 month term program with rates starting at 7.99%.
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 today to discuss your next new construction loan deal.