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.
What types of projects are construction loans meant for?
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.
How does a construction loan differ from standard investment property loans?
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.
Do I need good credit to qualify for a construction loan?
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.
How does a construction loan help cover my costs throughout the project?
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.
What costs are required to close a construction loan?
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.
