You have a new residential construction project planned out, but now you need to obtain financing. If you started this process by visiting a conventional bank lender, you may have left the conversation feeling a bit disappointed. Banks have strict lending requirements that prevent many construction projects from obtaining traditional financing. Fortunately, there are other ways to fund your project.
Here’s a look at five lending options for new residential construction projects:
Bridge Loans for New Construction or Renovation
Bridge loans are short-term financing options used to “bridge” the gap between the purchase of one property and the sale of another or between obtaining longer-term financing. They can be particularly useful in real estate transactions where timing is critical.
Bridge loans may be an option if you have equity in another property that you can use while building your current project. Taking cash out of your other property can be a faster way of obtaining financing, as your lender won’t need to evaluate your construction plan or experience (since they’re lending on the completed property).
What to Know About Bridge Loans:
- Short-Term Financing: Bridge loans are typically for a short duration, usually 6 months to 3 years.
- Collateral: These loans are often secured by the equity in an existing property, allowing borrowers to access funds quickly.
- Flexible Use: Funds from bridge loans can be used for various purposes, such as purchasing a new property or renovating an existing property.
- Temporary Solution: Bridge loans are not meant to be a long-term solution. They provide temporary relief until more permanent financing can be arranged.
LEARN MORE ABOUT BRIDGE LOANS HERE
Construction to Permanent Loan for Investment Property
Construction to permanent loans are available through some banks and offer short-term construction financing, followed by a traditional 30-year loan. In order to qualify for this type of financing from a bank, the borrower must meet all of the requirements for the 30-year loan. These loans are typically designed for homeowners who plan to live in the property after completion, and likely aren’t appropriate for investors looking to sell the property.
What to know about Construction to Permanent Loans:
- Short-Term Financing: Typically, construction loans cover the period of construction, usually 6 to 18 months.
- Construction to Permanent Loans: These loans transition from a short-term construction loan to a traditional long-term mortgage, such as a 30-year loan, upon completion of the project.
- Draw Schedule: Funds are disbursed in stages or “draws” as specific milestones of the construction project are completed, ensuring that the loan is used appropriately.
- Detailed Plans and Budgets: Lenders require detailed construction plans, timelines, and budgets to approve the loan, ensuring that the project is feasible and financially sound.
- Monitoring and Inspections: Lenders often conduct periodic inspections to verify that construction is progressing according to the plans and timelines.
In summary, construction loans, particularly construction to permanent loans, offer a streamlined financing solution for homeowners planning to build their dream home. These loans provide the necessary funds for construction while transitioning smoothly into a traditional long-term mortgage once the project is completed.
LEARN ABOUT CONSTRUCTION LOANS
Private Construction Loans
Some private lenders, like LYNK Capital, offer loans specifically for investors looking to build new construction projects. This lending option can provide flexibility and fast funding, and lenders will typically underwrite these loans primarily based on the property value and your construction experience. Unlike banks, private construction lenders will not typically scrutinize your tax returns and calculate onerous debt-to-income ratios. Most private construction loans, including ours, are not available for owner-occupied properties. If you’re building a new home with the intention of occupying it yourself, this loan is not right for you. Investors and developers can benefit most from private construction loans.
What to know about Private Construction loans:
- Investor Focused: Private construction loans are designed primarily for investors and developers, not for owner-occupied properties.
- Flexible Terms: These loans often provide more flexibility in terms of repayment and loan structure compared to traditional bank loans.
- Fast Funding: Private lenders can typically offer faster funding due to streamlined approval processes, which is crucial for timely project initiation and completion.
- Property Value-Based Underwriting: Approval is often based on the projected value of the property upon completion, as well as the borrower’s construction experience, rather than personal income or credit history.
- Experience Matters: Lenders place significant emphasis on the borrower’s experience in construction and real estate development, ensuring that the project is managed by someone with proven expertise.
- Non-Owner Occupied: Most private construction loans are explicitly for non-owner-occupied properties, making them unsuitable for individuals looking to build a home for personal use.
LEARN ABOUT FIX AND FLIP LOANS
Hard Money Construction Loans
Many private lenders offer hard money loans. These are similar to private construction loans, but are tailored more for borrowers unable to qualify for other forms of financing. Interest rates on hard money loans are typically higher, but more flexibility may be offered in underwriting requirements. Just like private construction loans, hard money loans may not typically be used to finance owner-occupied properties.
Loans from a Private Investor
If you know an investor with cash available and are able to work with them on your new residential construction project, then great! Private investors can offer the most flexibility for your project if they’re willing to negotiate terms. However, unless you know someone who is an investor or someone who can put you in contact with an investor, financing your project with this option will be difficult.