Building a home or raising a real estate project from the ground up is expensive. If you are looking to raise money for your next construction project, you probably have encountered the bureaucracies of traditional financing. From tedious approval procedures to the length of time it takes to actually get the funds, you could miss new opportunities, not to mention the frustration you have to deal with. At Money Lender Loans, we bring you private loans to finance your new construction project so that you can achieve your goals as planned. Our private financing allows you to complete your real estate project regardless of your credit score or financial position. Read on to learn about our new construction loans.
Understanding New Construction Loans
A new construction loan is a short-term private money loan designed to finance the construction of a home or a new real estate project. New construction projects are risky for traditional lending institutions to finance. The risk comes from the lack of a concrete asset that the lending institution can hold onto. Investing in a construction project is similar to investing in a new business where you are not sure of anything.
While there are ways to calculate the numerical value of risks, a traditional lending institution may still shy away from financing new construction projects. Some of the risks associated with a new construction project include:
- Land value risks which refer to the risk of the value of land changing due to changing market circumstances
- Land exploitation risks which arise from environmental factors
- Construction risks which happen when a construction experiences difficulties, delays, additional costs and design delays than was anticipated
- Revenue risks which may arise from market demand and supply, yields, and rent values. These factors affect the repayment of loans and returns from a project
- Legal risks which arise from issues with the construction such as obtaining permits, payment of workers and taxes
Due to the high risks involved, conventional lending in situations will require you to have high credit scores and assets to serve as collateral. In addition, traditional loans have a longer closure period; therefore, not ideal for faster financing.
New construction loans overcome the shortcomings of traditional financing by offering loans with a shorter closure period and a faster approval rate. Most lenders approve new construction loans within a day of the application. After the prequalification, you start receiving funding within two weeks of approval.
Usually, these loans have a repayment period of 1-5 years, with most lending institutions preferring to lend for up to one year. Depending on your project, you can negotiate with the lending institution to have the repayment period extended. However, due to the risk involved in new construction loans, lending institutions do not extend the repayment period beyond five years. New construction loans are risky investments, which explains their higher interest rates.
Funding for construction projects comes in installments as your project progresses. The lender will send money directly to you or may prefer to pay the contractor directly. During the construction project, the lender might require that you repay the interest on the loan only. After the completion of the project, most lenders will require full repayment of the loan. At this point, you can refinance your loan by mortgaging it or taking a new loan to offset the construction loan.
In this form of private financing, the building becomes the collateral for the loan. For this reason, the lender may come up with restrictions about the type and design of homes and properties they can approve. At the end of the day, lenders are taking a risk by investing in your project; therefore, they get a say in the design, and scope of your project. If you have an unusual design or are constructing under unusual circumstances, the lender may decline your loan request.
Most construction lenders are reluctant to fund the project you are building yourself. If you are the owner of the project, lenders prefer you hire a qualified contractor who can successfully run the project - unless you are a successful contractor yourself.
You may feel angry or uncared for upon such a rejection; however, the lender has to look at the possibility of you defaulting on the loan. Will the property be appealing enough to fetch a price that will offset the loan?
New construction loans also apply the principle of borrowing what you need, when you need it. Unlike other loans, you receive the loan in bursts depending on the stage of construction. This method of disbursement is beneficial to both the lender and the borrower. The lender does not put all their money into the project, and the borrower does not have to make repayments for the loan soon after the disbursement.
How New Construction Loans Work
New construction loan lenders usually finance between 60% and 100% of the total building cost depending on your credit history and the cost of your project. Most lenders will give loan amounts between $75,000 and $5,000,000. With such financing, you can get your project off the ground and complete construction.
The application process involves two steps:
- The prequalification phase, where you learn about the options the lender has to offer for your needs and financial condition. You then have to decide on the option that best serves your needs. During this stage, you can come up with the maximum budget for your project and initiate the loan purchase.
- The funding phase involves the approval and issuance of funds. At this stage, the lender assesses your experience in the industry, whether as a real estate investor or a builder. It is at this stage that you present most of the loan requirements, such as your credit history and your work portfolio.
Before applying for a new construction loan, you have to come up with the blueprint for your project. You should also provide a projection of the required materials, finances, and workforce required for the construction of the project. In addition, the lender will require proof that you are part of the project for which you are seeking funding.
Note that, when creating the project timeline, you have to account for delays and surprises. Accounting for these unforeseen circumstances makes your plan realistic enough and give you enough time to deal with these surprises and delays, without affecting your loan standing.
You should also decide on the purpose of the loan. The most common uses for new construction loans include:
- Buying land
- Purchasing materials and equipment required for your construction project
- Expanding the facilities of your existing business by building new offices or remodeling the existing ones
- Hiring and training construction employees
- To renovate and make repairs after a natural and unforeseen disaster such as an earthquake
Lenders require you to meet the following requirements for you to qualify for a new construction loan:
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Down Payment
As mentioned earlier, new construction loans are risky for lenders. To cover this risk, the lender will impose high-interest rates and require a higher down payment. For such loans, you have to provide a down payment of between 20 and 25% of the total cost of the project. Your willingness to raise the amount reflects well on how invested you are in the project.
If you already own the piece of land for the project, then you can use the land as a down payment. This means the lender will hold on to your land and provide full financing for the project. In most cases, lenders might give you full financing where you already own the land. Remember that new construction lenders are confident in financing projects in which the borrower has invested time, resources, and energy.
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Income
Lenders may look at your income, especially when requesting a new construction loan to build your home. Your personal income allows the lender to decide whether you can make the regular monthly payments for the mortgage. The lender will weigh your income, expenses, and debts to determine whether you can comfortably repay the loan.
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Personal Credit
You have to have a strong personal credit for you to access new construction loans. Most lenders will loan you even with a credit score of at least 500. In most cases, traditional lenders would disqualify you with such a credit score, but private money lenders are more flexible. The lender will examine your FICO score as well as the credit history of your business. Information about your credit forms a basis for sound decision making on the part of the lender. The lender has to have a justified risk when they choose to invest in your project.
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Affordability
Although lenders are in the business to make a profit, they are sensitive to the financial situation of their clients. For instance, when an investor borrowing to build rental properties, the lender will check to see whether the investor can afford the monthly repayments, repay the expenses for construction, and earn an income. In addition, lenders will not give a loan for the loner than the borrower can afford to pay.
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Financial Documents
The lender requires seeing the financial documents relating to your property or business, to determine whether they have existing loans and your loan repayment behavior. If the loan is for your business construction, you have to provide the financial statements, tax returns, and proof of assets for the business.
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Reputation
Lenders of new construction loans are keen on the reputation of the builder you are using for your construction project. They have to examine the reliability, reputation, and credit history of the constructor you choose. Therefore, you have to do your background check on the builder before hiring him or her. The builder should have a record of successfully completed projects and good reviews from previous clients.
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Appraisal
New construction loans finance a construction project before its completion. The lender, therefore, has to conduct an appraisal to project the value of the property upon completion. The projected value determines how much the lender is likely to invest in the property. Your lender will appraise the value depending on the geographical location, the costs of construction, and the value of similar construction projects in the area. Once you complete the construction project, the lender will re-appraise the property to determine its quality and worth.
The second appraisal is important if you will be refinancing the loan into a mortgage, or if the lender has to sell the property to recover their finances in case of a default.
If you qualify for funding, you and the lender will decide on the most appropriate repayment plan for you. In other instances, the lender advises you on the most appropriate product for your project needs. You should understand your long-term needs for the project and your ability to repay the entire loan within the repayment period before choosing the type of new construction loan to take.
Your lender will disburse the funding in "draws." A draw is a part of the loan you take at a certain time during the loan period to finance the construction project. Depending on the lender, you may have to fill out the online forms or complete some paperwork before submitting it for approval.
Depending on the requirements and terms of the lender, you may have to provide a budget of the materials you need, salaries, and progress reports of the construction. The lender may avail themselves at the construction site to assess the actual progress.
Types of New Construction Loans
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Construction Mortgage Loan
A construction mortgage loan finances the construction of a real estate project until its completion. The lender makes payments in stages as you complete the construction. Before an allocation, the lender has to confirm that the construction proceeds as planned.
You can take a construction mortgage plan to purchase land and build. You have to repay this type of loan by the end of the construction period, and the interest on a monthly basis.
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Construction-to-Permanent Loan-Permanent Loan
This loan combines a construction mortgage loan and a mortgage. During the construction, you have to make payments for the interest until the end of the construction. Once the construction is complete, the loan converts into a mortgage with a repayment period of fifteen to thirty years.
If you are taking a loan, which you intend to convert into a mortgage, this is the best option, as it automatically becomes a mortgage after the completion of construction. You need to communicate with your lender before taking any loan to determine the best option for you and the eventual cost of each loan.
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Commercial Construction Loan
Real estate developers take this type of loan to construct homes, apartments, and rental units take this type of new construction loan to finance their large-scale projects. Before taking such a loan, the lender will assess the future profitability of the enterprise and the possibility to recoup their money in case of a default.
How to Choose a New Construction Loan
Constructing a home or real estate property can be overwhelming, considering the amount you need to inject into the venture. Financing makes it possible to achieve your goals even with little cash at hand. Lenders have made available different loan products under new construction loans to suit the needs of a variety of customers. This gives you options to pick from depending on your needs and long-term goals. Selecting the most appropriate product not only helps you get your project ahead but also streamlines your future investment goals.
First, always shop around to find the products offered by various lenders. Look at the loan terms and conditions and the options you have with these products. It is wise to shop around when you are not in a desperate need for money. That way, you can make sound decisions and not have deadlines looming above you. If you feel confused about the process, ask questions, or consult a broker who is knowledgeable about new construction loans.
Once you have zeroed in on the most appropriate lender, check their experience. Look at how many years the lender has been in business and the construction projects they have supported. A lender without a portfolio is a risky business and not the type of lender you need for your project.
A good idea is to ask your friends or relatives for a referral. Utilize your network to find recommendations about lenders. Your network will provide you with a truthful account of the lenders they have dealt with as well as their experience. Ask as many questions as you can before you settle on the best lender for your project.
You should also check their rates and fees. Most lenders give loans with an origination fee of up to three percent. Check other costs, including prepayment penalties. When you fail to repay an installment, you have to pay fines for the delay.
Find a New Construction Loan Near Me
Building a new home or investing in real estate should not be a problem for you. Private money loans such as the new construction loans will put you above the competition or fulfill your dream of building your home. Money Lender Loans offers new construction loans to clients of diverse credit histories and financial positions. Our loans are affordable, have flexible repayment plans, and you can convert your construction loan into a mortgage once you complete the construction. We offer various types of new construction loans to suit different goals. If you are considering financing for your next construction project, call us at 949-409-4372 for a consultation.
