Construction loans are frequently used to finance major home repairs, including the repair of shingles, foundation, siding, or the addition of a new building, when a homeowner otherwise has little or none available funding. Unlike a traditional mortgage, applying for a construction-to-permanent loan poses several complications. One difficulty is verifying a borrower’s ability to repay the loan. Another is evaluating the cost of the proposed renovation. Finally, there is the challenge of finding construction-to-permanent financing, especially when the current interest rates are low.
While most lenders have requirements for borrowers to have a viable financial future, many construction companies do not. In order to secure construction loans for remodeling, a builder must convince the lender that the end result will be profitable. One way to convince a lender is to show him or her that the project will generate enough revenue to pay for itself in three to five years. Many lenders are willing to negotiate on this point, which allows the builder to include more expensive materials and pay down on the principle.
When trying to secure construction loans for remodeling, it helps to have a close confidant or two on the project. Construction managers and bosses are usually involved in some capacity with the project and have been instrumental in making wise decisions regarding elements of the plan. It can also help to keep on the relationship when approaching a potential lender. The boss may be able to arrange for a joint venture; this provides the lender with a chance to view the finished product and provide feedback before advancing money. In turn, the boss may use the information he or she provides to recommend another builder that is a good fit.
Construction loans come in many varieties, including builder-financed projects, construction-to-permanent financing, construction loans against land (constructed after construction), construction loans for different purposes, and prime rate construction loans. The prime rate is a term used to indicate construction loans at the time of purchase, usually at about 70 percent interest. A contractor seeking construction loans should shop around for the best interest rate. Some prime rates have a large number of borrowers; however, there are also those that are exclusive to small businesses.
A builder seeking construction loans can work directly with either the lender or general contractor. Most builders go with a lender because the general contractor already has a lined up financial relationship with the lender. Because the lender is more likely to approve a construction loan for larger projects, he or she can offer a lower interest rate. For smaller ones, it may be best to work with a general contractor whose reputation and track record to support his or her ability to get the job done right. Lenders are also willing to lend larger amounts than general contractors because they have less risk. The construction loans may be higher, but the lender has the means to recoup his investment faster.
The lender has certain criteria that he or she will look for in a construction loan. One important factor is whether or not the borrower and the contractor are on the same page. It will take some negotiation skills on the part of both parties in order to make a loan program that works out for everyone. In general, a lender will want to see an inventory list of all the materials needed for the construction project. The lender may also ask for photographs of the proposed site or even video taken by the contractor showing how he plans to build the building.
After making all necessary investigations and finalizing a plan, a construction loan company will file the proper forms with the county clerk. These forms can be located online and can be completed in just a few minutes. Construction loans can come in one of two forms: a traditional mortgage or a balloon mortgage. In a traditional construction loan, the lender will secure the funds when the building is finished. Balloon mortgages are very similar and are usually used when securing funding for major projects that will take a while to pay off.
Although a stand-alone construction loan is the most common type of construction funding available, it is not the only type. Construction loans can come in many different forms and many different types of lenders. Before you begin your search for the right lender and the right construction loan, you should determine the purpose of the construction project and the amount of money needed. This will ensure that you choose the right type of funding for your new home construction project.
