What Are The Requirements For a Construction Loan? [By An Expert Lender]

If you’re thinking of taking on extensive construction or renovation on a property you own or are considering building a home from the ground up, then a construction loan could be the financing you need. However, before you can get the funds, you need to have all your ducks in a row as well as a clear idea of what you’re after. 

There are a number of construction loan types available. On top of that, construction loan requirements differ from traditional mortgage loans. Without having a base knowledge of construction loans or their requirements, you’ll find it harder to get the funding you require. But don’t worry; we’re here to help.

NEED ADVICE? SPEAK WITH A SEASONED LOAN OFFICER TODAY

Here at We Lend LLC, we’re experienced construction loan lenders. And, in this guide, we’ll arm you with all the information you need to choose the right construction loan as well as what you need in order to lock down funding. Let’s get into it:

What is a Construction Loan?

A construction loan is a short-term loan that provides investors with the funds to finance a significant residential construction project, such as a ground-up construction or an extensive refurbishment.  

Often, contractors, builders, or homebuyers take out construction loans to cover the costs of the project before obtaining longer-term funding, for example, a traditional mortgage. Construction loans are seen as higher risk than more conventional property loans, so therefore come with a higher interest rate than a conventional mortgage.

Construction loans usually require a great deal of pre-planning and vetting before a mortgage lender approves the funds. In fact, they’re harder to qualify for than a mortgage, with some traditional lenders requiring a credit score of at least 680.

Apply for a We Lend Construction loan here and begin your real estate project sooner rather than later. 

Types of Construction Loans

There are four main types of construction loans available on the market. Let’s take a look at them:

• Construction-to-permanent loans – These loans provide funds to build your dwelling and for your permanent mortgage as well. This can only be acquired through banks and other traditional financial institutions. 
• Construction-only loans – This option provides the funds to complete the building of a property.
• Renovation loans – This loan is for upgrading an existing home, rather than building one. 
• Owner-builder construction loans – These are construction or construction-only loans where you as the borrower also act as the home builder. This is typically only allowed if you’re a licensed builder by trade.

Before you decide on any type of construction loan, it’s worth talking to your contractor to hash out the timeline needed for construction or renovation. Moreover, keep in mind external factors that could slow down the job, e.g., bad weather or unavailable materials.

This way, you’ll have a better idea of the window you’ll need to repay your construction loan – especially as the typical term of this type of loan is 12 months. 

Construction Loan Requirements

Now you know the different construction loans available, we’re going to look at what’s required to assure your lender you’ve got your project mapped out and are funding and building ready. 

A Qualified Contractor Or Construction Team

No right-minded lender will hand over a substantial amount of money without a licensed builder on board. 

Lenders will ask you to submit evidence of their projects, both past and present. Furthermore, a lot of lenders will also request a profits and loss report. 

A qualified builder is a licensed contractor who has experience building the type of home you’re planning and carrying out long-lasting renovations. If you cut costs and decide to go with an amateur builder or take the reins yourself, the majority of lenders won’t go near you. Moreover, there’s an increased risk and you could jeopardize your whole build. 

Take it from us, don’t cut corners here. Go with a knowledgeable and trustworthy contractor and save yourself the worry and potential hiccups down the road.

An Appraisal

The criteria of a construction loan is based on the potential value of the property upon building completion. You will be unable to provide that information without an appraisal. 

All investors – regardless of their real estate investment exit strategy – should have an appraisal carried out as part of their due diligence and to ensure they can maximize their ARV. 

Licensed appraisers estimate a home’s value. They do this by assigning value to the plot of land in which the building is to be built upon, of the property that is to be refurbished, and then comparing it to comparable properties. The properties used for comparison are referred to as “comps” and they inform the perceived value of your property.

PRO TIP: If you want a second opinion on your property’s appraised value, speak to some experienced real estate agents. While they are not appraisers themselves, they will know your real estate market and will have sold or let similar properties.

A Large Down Payment

Due to the increased risk that comes with a large construction project, a construction loan requires a larger down payment than some other types of loans. This ranges between 15% to 25%.

The down payment percentage is determined by a few factors:

1. The ambitiousness and scale of the project
2. The experience of the construction team 
3. The lenders own rates

This higher down payment is to ensure you’re committed to the project and to protect the lender if your property doesn’t meet the value set by your appraiser. 

Detailed Construction Plan

If you want to maintain a positive relationship with your lender, you need to provide a detailed description of every aspect of the construction plan. 

In its final form, this is referred to as the “blue book” and includes the following information:

• The timelines of the project
• Floor plans
• Costs of materials
• Profit projections
• The suppliers and contractors involved

Besides being a requirement for lenders, your blue book is also a useful document that can help you stay on track with the project. 

Where Can you Get a Construction Loan?

Construction loans can be acquired through many banks and other traditional financial institutions. However, as mentioned before, this type of loan can be a lot more difficult to be approved for than a traditional mortgage. To qualify, you’ll need a really good credit score and a lot of patience while you wait to be approved. 

The alternative is going with an experienced private money construction loan lender, like We Lend LLC.

We focus more on the end value of the project and the experience of the people involved, rather than just relying on a credit score. And what’s more, as a small agile lender, we can approve and release the funds within days, rather than weeks or months via a traditional lender. 

Get in touch today to find out more!

WE LEND OFFERS A RANGE OF PROGRAMS TO SUIT EVERY TYPE OF RESIDENTIAL REAL ESTATE INVESTOR.

Bottom Line

Real estate projects that require construction loans are not straightforward. As a result, there are more hoops to jump through than other forms of real estate financing. 
However, you can avoid some of these hurdles by being prepared and going with a private construction loan lender, and surrounding yourself with real estate experts.