If you want to build something new or renovate a property, you may need a construction loan.
Construction loans provide short-term financing meant to fund building projects. Accessible financing is based on the value of the finished property and the overall project costs, rather than your personal assets.
What is a Construction Loan?
There are a handful of options to finance investment property. Loan types often differ based on their qualification requirements and the terms they offer. The best loan for you will depend on your individual needs.
With a construction loan you can qualify for a short-term mortgage that will finance the costs of building or renovation, including land purchase, building plans, permits, labor, and materials.
A construction loan allows for a lower credit score and higher Debt-to-Income (DTI) ratio to qualify. This is possible because it doesn’t have to meet the documentation requirements that the Consumer Financial Protection Bureau sets for standard loans. Instead it relies on the future value of the property, the overall project cost, and whether the deal overall will be mutually beneficial.
Construction loans are great for homebuyers, builders, contractors, or investors who want to build a new home, business, or investment property and who may need flexible requirements to qualify for financing that meets their individual needs.Submit Your Loan Scenario
How to Get a Construction Loan
If you’d like to see whether you qualify for a construction loan, connect with us. To get you started, we’ve outlined the steps and qualifications needed to help you understand the process.
The Financing Process
By sharing basic information about your budget, estimated timeline, and building plans, we’ll work with you to see if a construction loan meets your needs and whether your project qualifies.
As we move through the process we’ll discuss the terms your project qualifies for and your financing options, as well as request the necessary documentation.
We’re with you through each step, leading to a simple and efficient closing so that you can move forward with your investment.
Construction Loan Requirements to Meet
These are some of the common requirements often needed to qualify for a construction loan. If you have questions about these requirements, we’re here to help.
- We’ll need to know what the expected leverage is for the property. In many cases, the Loan-to-Value ratio needs to be above 70-75%.
- We don’t need income information but do need bank statements and credit score information for the borrower.
- To understand the stability of the investment, we’ll need your plan for the build including your estimated budget and timeline.
- An appraisal of the property will need to be done to assess its potential value.
- It may also be helpful to provide any relevant past experience you have with managing real estate construction projects.
Construction Loan FAQs
Financing construction is an important step in reaching your investment goals. It’s ok to have questions. We’ve compiled answers to the frequently asked ones, but don’t hesitate to ask more.
Construction loans can be used for new construction or to renovate an existing building. They’re available to a range of people, from real estate investors to homebuyers.
You may qualify for an owner-occupied loan as a business or consumer. For example, as a consumer you may want to build your new dream home, or as a business, you may want to build a new office building for your team. Maybe you want a non-owner occupied loan and need to qualify as an investor who plans to build a property and sell it. With a strong and clear building plan, construction loans work well for many scenarios.
Construction loans provide financing for a specific investment purpose. They cover the costs of planning and building real estate, rather than the funds to purchase or refinance an existing building. For this reason they’re offered with shorter term lengths, meant to cover the timeline of the project. Because these investments are also riskier for the lender, as there isn’t yet an existing building, the interest rates are also slightly higher for construction loans.
They meet the unique financing needs of construction projects by offering flexible qualification requirements based on the value of the finished property. This makes them more accessible than standard loans that require certain income and other documentation related more to the borrower’s personal finances than the project itself.
Although your personal income isn’t considered for financing, you will need to share your credit score to get approved for a construction loan. The minimum requirements vary depending on the situation and can be more flexible than standard banks allow. In many cases a credit score of 680 or higher is often best.
When you close on a construction loan, a portion of the loan amount is immediately used to purchase the property or land. The remaining balance is kept in an escrow account, which is then disbursed to you, the borrower, as the project proceeds, based on agreed-upon phases of the project between you and the lender.
There are closing costs associated with processing any loan, and the costs of a construction loan are comparable to standard mortgages. They include costs for the lender to service the loan, as well as an appraisal and other fees.
You’ll also need to make a down payment that will be paid at closing. The down payment amount will depend on the specific details of your project and your equity.