Complete Guide on Construction Loans


Building a house is a beautiful experience; however, it is also a lengthy and costly process. Most people do not have sufficient money to settle the upfront cost of the construction. Getting a loan for this type of task can be pretty tricky. The standard type of loan provided by the mortgage lender and bank will definitely not cut it. Fortunately, there is a good chance that you are qualified for a particular loan like a construction loan.


What is a Construction Loan?


Building Construction

A construction loan is a short-term loan that you can use to cover the cost of building a residential or commercial property. The lender can offer this on a set term that will typically last for about a year, giving you enough time to complete the construction process. After you build your home, you will have to apply for a new loan to cover the loan. It simply means that you have to refinance at the loan's consummation and choose a more appropriate traditional financing option for your house.


How to be Qualified


Traditional mortgage lenders and banks are cautious about construction loans for many reasons. One reason is that you need to put your trust in the builders. It isn't easy to lend your money in an upcoming real estate development, and hope that it will have some value after the construction has been completed. To approve your application, traditional commercial lenders have a set of complicated requirements.


·         The Involvement of a Qualified Builder- The construction should include a licensed contractor with a solid reputation in constructing top-notch homes. It means that you will have difficulty finding a financial institution that will finance your real estate development if you are working with a general contractor.


·         Details Specs- This may include even the tiny details like the materials used in the construction and the floor plans. Your builders will generally create a list of details referred to as blue book that includes every detail, such as the type of insulation used and the exact height of the ceiling.


·         Home Value- A certified appraiser should estimate the value. You might be wondering how an appraiser can compute the value of a property that does not even exist. Basically, you will have to use the blue book of your builders and the land value to estimate the property's market value.


Hard Money Lenders


If the traditional commercial lenders have rejected you, you may opt for a private hard money lender with more liberated requirements. They will be able to approve your application as long as you (the borrower) have sufficient equity invested in the property being constructed. When choosing this construction loan, the high interest rate on private money lenders will seem a bit scary. However, the benefit of receiving the loans quickly dramatically outweighs the cost.


Things You Want to Know About Construction Loans of Hard Money Lenders


Over the past few years, the landscape of money lending has immensely changed. Commercial lenders have started to deliberately and closely assess the credentials of their borrowers. Some lenders are now cautious about the new construction loans since most of them negatively affect the real estate value. Although traditional lenders such as banks and other financial institutions are wary about this type of loan, private lenders are willing to finance this project as long as they perfectly fit their requirements.


Essential Things That a Broker Needs to Be Aware of When Applying for Construction Loan


Here are some things that a broker needs to be aware of when they are looking for a private lending company that will finance their real estate development project.




Your lender should be comfortable with the physical location of your property. Usually, the hard money lender will only approve your loan application if your construction location is viable. Your site should assure them that you will be able to sell the property in a desirable period and help you pay off the loan.


Down Payment


You need to know how much of the builders' personal money will be allotted in the project. This requirement of the commercial lender may vary depending on the company. Some agency does not have any down payment requirement, and others have a minimum of 10% down with subordinated or free-and-clear lot. Construction loans allow you to work with the lender on anything related to the construction activity and then with a correspondent lender for refinancing using your hard money loans.



 Construction Loans

You need to familiarize yourself with the process of the builder or the subcontractor. Private lenders have a more liberal approach in terms of site inspection. They are willing to hand in the money you require after the inspection. However, this may not be the usual process of the large commercial lenders. They may need the title company to pay the subcontractors or the builders directly after receiving the wavers. You should first contact your title company and be aware of the existing lien laws, particularly in your state.


Lot Lien


You need to know if the hard money lender will include the entire (or some) of the lot cost in your construction loan. Generally, the lender wants to be exclusive of the lot, or at the very least, they should be assigned as a subordinate to the top position. Some lenders will approve up to 70% of the real estate development market value and permit a fraction of the lot cost to be financed in the deal.


Rate and Fees

 Blue Print

You should be highly aware of the general terms related to the fees and rates. Traditional builders in the past who deal with conventional commercial lenders such as banks may balk at a 12% interest rate and 6-month loan. However, you need to show them how they can generate profit after completing the deal.


The broker should show the different parties that this transaction is valuable to receive compensation for the work. The builders should secure funding that will help them complete their projects. Stand out from the competition by learning about the critical factors mentioned above.

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