Get A Construction Loan For Your Investment Property: A How-To Guide

Construction Loan For Real Estate Investment

Since today’s homebuyers and real estate investors have so many financing choices open to them, making the right choice can be hard. One choice worth considering when it comes to upgrading your home, or even building a new one, is renovation loans.

Renovation loans, or construction loans, may be used for a variety of projects but allow the borrower to customize their space or property almost always. Anyone involved in new building or a big renovation should find this as a viable financing option. Keep reading to learn if such loans are right for you, and how to apply.

Construction Loan For Investment Property

What Are Construction Loans?

Construction loans are opportunities for short term funding for new real estate or renovation projects. They are used to pay for the building costs of a new house or to repair an existing one. Construction loans exist only for the time it takes to complete the project and borrowers borrow only what they need. These loans are allocated directly to the contractor (instead of the borrower) in segments called “draws”. Draws are labelled as certain elements of the project are completed, such as the foundation being poured or the frame being built.

The key advantage of construction loans is that they enable homebuyers or investors to build a new house; however, the ability to customize a house comes at a cost. Construction loans, for example, are considered to have higher interest rates than normal. Usually, the system is set up to protect lenders who are assured that a project will be finished correctly, and that they will have a certain amount of worth when done. Nonetheless, homeowners should not rule out this option as this method of financing has a number of benefits.

What Can A Construction Loan Be Used For?

For a number of projects a construction loan may be used, depending on the conditions and terms of agreement of the lenders. Below are some of the ways to use a construction loan for investment properties:

  1. Purchase of raw land
  2. Pouring foundation
  3. Constructing an addition to the real estate
  4. Finishing and framing a building
  5. Constructing sheds or other structures
  6. Putting up 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 requirements for approval will differ slightly for each. A construction loan is used to create new buildings or renovate existing ones, while a home loan is just a conventional mortgage. All forms of funding would include a credit check and other financial details, but a construction loan would also require approval of the project plans before the loan is given.

Additionally, construction loans should only be used for project duration. In comparison, home loans are issued for a fixed amount of time before they are paid off. Usually, lenders who rely on construction loans will refinance their property upon completion of the project, and pursue a more conventional loan. To do so, homeowners will go through an inspection and assessment of the property.

What’s The Difference Between A Construction Loan And A Renovation Loan?

The distinction between construction loans and renovation loans lies with project form. Construction loans with concrete project plans are used for new properties. By the completion of the building phase, those who use construction loans must usually switch to a normal mortgage as well. Conversely, developer construction loans are used to purchase fixer uppers or renovate existing homes. Such loans may be used for cosmetic as well as structural repairs, such as insulating a home or updating a kitchen.

Can You Get a Construction Loan For An Investment Property?

Yes. So long as the project plans and finances meet specified lender conditions, you can get a construction loan for an investment property. Unlike other home loans, there is no mechanism that specifies that a construction loan must refer to a primary residence. In reality, construction loans can, for a variety of reasons, be a great choice to fund an investment property. Most importantly, real estate developers will also have experience working with contractors and overseeing construction projects. They could also be well-suited for supervising the building of a new house.

Renovation loans for investment properties also exist and can be accessed through a similar approval process. Investors interested in a loan for renovation construction should find that the loan is being allocated on the basis of the property’s after repair value. This is where the toolkit for investors can come in handy. When deciding whether or not a renovation loan is the right step for a specific project, depend on a good rental property calculator and contractor.

How To Qualify For A Construction Loan

In addition to getting their project plans approved, lenders must meet a variety of financial conditions to apply for a construction loan. For example, lenders must typically check the debt-to -income ratio and credit. Although the exact criteria differ according to your lender, many are asking for a credit score of 650 or greater. In setting up a construction loan, lenders will also have a down payment, which would typically be between 20 and 30 percent. Be sure you’re looking around while you’re searching for a lender; there’s plenty of choices available to get a construction loan, with specific conditions included with each.

You must also submit the construction plans for the project to get the final approval for a construction or renovation loan. Lenders would want to see detailed plans for the house, and an attached team of professional builders. It’s important to know that while you need finished loan approval plans, you can get a building loan pre-approved before you buy a home.

How To Qualify For A Construction Loan

Summary

The idea of customizing a property from start to finish, for both homeowners and investors, can seem unlikely. This is not the case here, however. Building a new property does not have to be a distant dream, with financing options like construction and renovation loans. While this form of financing is subject to approval requirements, it can open new doors for anyone interested in buying raw land or fixer uppers. Consider a construction or renovation loan next time you’re planning a project, it might lead to some amazing results.