The Most Common Questions Investors Have About New Construction Loans
11 Jan 2022
5 min read
Share this post
The great news about being a real estate investor is the various loan options available to you that fall in line with your overall goals, vision, and portfolio’s needs. If the market’s inventory leaves much to be desired, you might consider the option to build a house as opposed to buying an already existing one.
You may think, can I even afford to build a house, and the answer can surprisingly be, yes! The process for borrowing money to pay for a project is different from getting a mortgage to move into and live in an already existing property. With that massive differentiation in mind, the investment options can continue to broaden that much more. Here are a few of the most common questions investors have regarding this loan option.
What is a construction loan?
Also called Ground Up loans, they are primarily designed for experienced investors who are looking to either construct a brand new property or reconstruct a badly dilapidated one. They are typically short-term, higher-interest loans that don’t usually last beyond one year and require not only property completion within that time frame, but also the issuance of a certificate of occupancy.
With Temple View Capital Funding, LP (“Temple View”), investor scan have loan terms range anywhere from 12-24 months with up to $2 million funded. Rates are subject to change, so please check our website for the latest information.
How do construction loans work?
With private lenders like Temple View, investors with strong criteria can experience minimal red tape throughout the application and approval process, however, there are basic funding rules in place all investors should be aware of if considering this loan option.
Unlike a traditional mortgage where your home acts as collateral if you default on your payments (meaning the lender can seize your home), construction loan lenders do not have that option and therefore seethese options as bigger risks. As a result, loan rates tend to fall on the higher end.
Because they exist on short timetables, construction loans are dependent on the completion of a project, meaning you the investor will have to provide a thorough, feasible, and strategic timeline, plans, and budget when applying for the loan. If approved, your lender will expect a draft schedule that follows the various construction stages closely during which you’re only expected to make interest payments.
What does the loan typically cover?
The loan’s coverage is pretty bare bones, or rather, it covers the absolute basics of constructing a house: the cost of the land, contractor labor, building materials, and permits required to complete the project. While things like home furnishings are never covered by construction loans, more permanent fixtures like appliances, as well as landscaping, can be included if agreed to by both the lender and borrower.
However, no assumptions can or should be made about what a loan covers. Have these discussions early on with your lender, particularly when considering what will be included in your loan-to-value, or LTV, calculation.
New construction loans have the potential to elevate a portfolio and develop a strong partnership (and strong reputation!) with your lender. Considering things like budget, timeline, and the ‘why’ for choosing a construction loan will help you determine the best course of action moving forward and keep you honest along each step of the project’s progress. Temple View Capital offers nationwide lending for ground-up construction loans for single-family, 1-4 units, as well as townhomes with competitive rates and terms. To learn more about the terms and opportunities, contact Temple View today.