Renovation
or construction loans for investment properties can be used for several
projects but almost always allow the user to customize their space or property.
Anyone interested in new construction or a big renovation should investigate
this as a viable financing option. Keep reading to learn if these loans are
right for you, and learn how you can qualify.
What Are Construction
Loans?
Construction
loans are short-term financing options for new real estate or renovation
projects. They are used to pay for the costs of building a new house or
upgrading an existing property. Construction loans are only applicable for the
time it takes to complete the project, and users only borrow what they need.
These loans are distributed directly to the contractor (instead of the
borrower) in segments called “draws.” Draws are marked as certain elements of
the project are completed, such as the foundation being poured, or the frame
being built.
The
main appeal of construction loans is that they enable home buyers or investors
to build a new property; though, the freedom to customize a property does come
at a cost. For example, construction loans are known to have higher than
average interest rates. The structure is typically set up to protect lenders
who trust that a project will be completed correctly and that it will be worth
a certain amount when done. However, homeowners should not rule this option out
because there are several perks to this form of financing.
Construction Loan FAQs
Construction
loans may seem self-explanatory, but investors who are inexperienced with using
this type of loan may have questions about what they are and how they can use
them. Look at some of the most frequently asked questions about construction
loans, before you decide if obtaining one, would be right for your next
investment project.
What Can A
Construction Loan Be Used For?
A construction loan can be used for several projects, depending on your hard money lenders’ requirements and
terms of the agreement. Here are a few of the ways to utilize an investment
property construction loan:
·
Purchasing raw land
·
Pouring foundation
·
Building an addition
to a property
·
Framing and finishing
a house
·
Building sheds or
other structures
·
Adding a garage
What’s The Difference
Between A Construction Loan And A Home Loan?
A
construction loan and a home loan are different in terms of what they can be
used for, and as such, the approval requirements will be slightly different for
each. A construction loan is used to build new structures or renovate existing
ones, while a home loan is just a traditional mortgage. Both types of financing
will require a credit check and other financial information, but a construction
loan will also require the project plans to be approved before the loan is
issued.
Additionally,
construction loans can only be used for the duration of the project. On the
other hand, home loans are issued for a set period until they are paid off.
Borrowers who rely on construction loans will typically refinance their
property after the project is completed and enter a more traditional loan. To
do so, homeowners will go through a property inspection and appraisal.
What’s The Difference
Between A Construction Loan And A Renovation Loan?
The difference between construction loans and renovation loans lies in the type of
project. Construction loans are used for new properties with definitive project
plans. Those who use construction loans will also typically transition into a
regular mortgage at the end of the construction project. In contrast,
renovation loans for investors are used to purchase fixer-uppers or to renovate
existing properties. These loans can be used for cosmetic and structural fixes,
like insulating a house or upgrading a kitchen.
Can You Get a
Construction Loan For An Investment Property?
Yes.
You can get a construction loan for an investment property as long as your
project plans and finances meet designated hard
money lender requirements. Unlike some home loans, there is no process stating
that a construction loan must be applied to a primary residence. Construction
loans can be a great option for financing an investment property for many
reasons. Most notably, real estate investors likely have experience working
with contractors and supervising renovation projects already. Therefore, they
may be well suited to oversee the construction of a new property.
There
are also renovation loans for an investment property obtained by following a
similar approval process. Investors interested in a renovation construction
loan will find that the loan is distributed based on the after-repair value of
the property in question. This is where your investor tool kit will come in
handy. Rely on a good rental property calculator and contractor
when determining whether or not a renovation loan is the right move for a
specific project.
How Can I Qualify For
A Construction Loan?
To
qualify for a construction loan, borrowers must meet several financial
requirements in addition to having their project plans approved. To begin, Hard Money Lenders will typically review
your debt-to-income ratio and credit. While the specific requirements vary based
on your lender, many ask for a credit score of 650 or more. Borrowers must also
have a down payment when setting up a construction loan, which should usually
be between 20 and 30 percent. Make sure you shop around when searching for a private
hard money lender; there are numerous options available for obtaining a
construction loan, and each will come with different requirements.
To
get the final approval for a construction or renovation loan, you must also
submit the project’s construction plans. Hard
Money Lender will want to see detailed plans for the property and a team of
qualified builders attached to the project. It is important to know that while
you do need finished plans for the final loan approval, you can get preapproved
for a construction loan before buying a property.
Best Type Of Loan For
Investment Properties
Three
construction loan types are best for investment properties: fix and flip loans,
purchase and rehab loans, and construction/purchase and build loans. Typically,
investment construction loans are reimbursement loans. In this case, the lender
will pay for each stage of construction as it is completed and signed off by inspectors.
Let us take a look at the best types of loans for constructing investment
properties:
·
Fix & Flip Loans: These loans are ideal for the
opportunist who has experience in buying, fixing, and reselling properties
within a short period. You will find that most conventional hard money lender and banks
will have no problem financing these projects if you comply with common sense
hard money underwriting guidelines. What will matter the most for this loan is
your experience in effectively flipping properties for-profit and the viability
of the project in question.
·
Purchase & Rehab Loans: These loans are best for purchasing old
or outdated properties and either demolishing them to construct a new one or
completely remodeling it to fit today’s standards. Again, the underwriting will
be the most important thing to get this project started.
·
Construction Loans/Purchase & Build Loans: These types of loans are available in
the purchase of a lot or for construction on an existing lot you own.
Construction loans and purchase and build loans are specifically for non-owner-occupied
properties with the intent of retail or future rental income.
Summary
The
idea of customizing a property from start to finish may seem impossible, both
for homeowners and investors. However, this is not the case. With financing
options like a construction loan
for investment properties, building a new property does not have to be
a distant dream. While there are approval requirements for this form of
financing, it can open new doors to anyone interested in purchasing raw land or
fixer-uppers. Consider a construction or renovation loan from a Private Hard Money Lender when you plan a
project; it might lead to amazing results.
Dennis Dahlberg
Broker/RI/CEO/MLO
Level 4 Funding LLC
Tel: 623-582-4444
Level4Funding.com
Private Hard Money Lender
Dennis@Level4Funding.com
Who is this Dude? Dennis brings with him
substantial experience in residential real estate. Dennis has extensive
experience purchasing, renting, and selling numerous homes over the past 45
years. His first purchase was a property in California when he was 18 years
old. Dennis graduated from California State University Pomona with
majors in Computer Science and Business Management. He is a Licensed Mortgage
Broker, Licensed Mortgage Originator, Licensed Real Estate Agent, Licensed
Insurance Agent Certified Sort Sales Specialist (CSS), Certified Negotiator
(CNE), and FAA Licensed Private Pilot.
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