Build to your own specification with
Construction Loans
Construction loans cover the costs of building real estate from the ground up. They may also cover renovations and land development. In most cases, a construction loan provides the funding to handle the upfront costs of building in the interim before longer-term financing comes through. Nontraditional and private lenders are more apt to lend on a short-term basis than most banks. These private loans are often much more flexible as a result.
OVERVIEW
Whether you’re looking to renovate an existing building, build on prepared land, or need to get your acreage ready for construction, there’s a construction loan to keep your project on track. Many of these types of loans can be rolled over into a mortgage to handle long-term costs and fees.
A development-only loan helps you prepare your land before construction begins. These loans are most often used to cover the costs of dividing a large plot into subdivisions covering state fees and laying in critical infrastructure. Many lenders want to see the development plans, an exit strategy, and the borrower’s cash flow before approving a development loan. Once approved, the funds can be used for land grading, installing utilities, and meeting zoning requirements.
A construction-only loan comes into play when the land has already been prepared and building is ready to begin. This funding option can also be used to cover the cost of renovations to an existing property, upgrading or expanding the space. In many cases, the lender will require interest only payments while construction is taking place. Then, the loan principal is due at the end of the loan term.
When all of the construction has been finished, there are two options. Either the borrower can sell the property to cover the principal due plus profit, or they can utilize what’s called a “construction-to-permanent” loan. These loans change character after the initial construction period. Instead of requiring a final balloon payment to satisfy the balance of the loan, these loans convert to have a 10-15 year repayment period. Multi family properties can have longer repayment periods.
LOAN HIGHLIGHTS
Construction loans can be used for land development, building construction, renovations, or a combination of these.
Construction-only loans often require interest-only payments during the term with a final balloon payment at the end.
Construction-to-permanent loans eliminate the need to take out a second loan to cover the first.
Funds can be used only for the purposes described and not for working capital.
PROS
- Construction loans can often be secured faster than a traditional bank loan.
- The structure of the loan can change depending on the borrower’s needs.
- Sometimes, other property in a company’s portfolio can be used to secure a loan.
CONS
- If construction doesn’t go as planned or long-term funding fails, the borrower is still responsible for satisfying the construction loan.
- These loans normally require extensive documentation and vetted contractors.
- Balloon payments can be more difficult to plan for than regular monthly payments.