The New Construction Loan process can be more complex than other loan types, as there are many moving parts and major factors in play, like the supply and demand in materials and housing, which can change while you are building.
As lenders that do a lot of New Construction funding, we know that this process can sometimes feel daunting. However, knowing ahead of time what to expect, and working with a lending partner who has your back, you can get through the process smoothly and quickly.
We are here to help!
Let’s get going with some New Construction Loan basics:
TIMING: Although many lenders take 4 to 6 weeks to approve New Construction Loans, you can often get through the process (especially using an Alternative Lender, like us) in 2 weeks or less.
RATES: We cannot speak for other lenders, but we can tell you that our New Construction Loans have similar rates and terms to our fix-and-flip loans.
FLEXIBILITY: New Construction builders are a varied group, which is why the loans for them need to be both flexible and creative.
For example, New Construction loans are often used to finance the construction portion of a new home or development project, but did you know that they can also fund a portion of the land purchase? Some lenders (we do this, banks do not) also offer loans based on “imputed equity,” the value of your property after doing work to improve it. Using this technique, a borrower can walk away from the closing table for the New Construction Loan with no additional funds out-of-pocket.
In addition, some builders are looking for a loan to build-to-rent, rather than a loan to build and sell. This requires loans that can accommodate both the build portion of the project, as well as the long-term loan for the rent portion of the project. (We offer a Build-to-Rent loan to make this process much simpler!)
MORE REASONS FOR GETTING A NEW CONSTRUCTION LOAN:
You might be surprised about the variety of reasons people come to Alternative Lenders (like i Fund Cities) for Construction Loans. We meet builders not just at the beginning of their project, but also along the way as their project progresses.
Here are a few real-life examples of contractors that have found a flexible Alternative New Construction Loan to be their best funding option:
A contractor has:
- Started a new construction project by paying out of pocket and now they need to pay their contractor upfront to start the next phase.
- Three shovel-ready lots that are ready for construction, but the process with banks is taking much too long to get started.
- A construction project that is encountering supply chain issues and delays, and they need to refinance their equity out of the project to keep the project moving.
- Raw land that is shovel ready and they are looking for their initial investment back at closing to buy or pursue more invest projects.
- “Imputed equity” and they need cash out for money they invested upfront to complete the project. (Imputed equity is when a project has some type of zoning enhancement, or you have done something to increase its value—e.g., you have a single-family lot they can now subdivide and build two homes or a duplex on.)
- A successful construction/development company with a stellar record in one state, but their bank will not fund them in a new region, due to their lack of experience there.
- Established a strong reputation in their market as a developer and are looking to obtain optimal leverage to support new construction projects but are finding it difficult to get “spec home” projects done with the bank.
(Want to see more real-life reasons why borrowers use Alternative Lenders? Check out this article.)
LOAN APPROVAL TIPS: New Construction lenders want to see that you have done your homework. After all, their primary goal is to be sure they are going to get paid back the funding they are offering.
Here are some tips to help you get your New Construction Loan underway and closed as quickly as possible:
- RESEARCH, RESEARCH, RESEARCH: Make sure you know current market trends for new construction in your area. Are you certain of who your target market is, and what they are looking for in a home? Lots of things can go wrong here, so be sure to know what is standard and expected by local buyers in terms of project square footage, home design, amenities, finishes, garage units, outdoor space, etc. The last thing you want to do is to build the right house in the wrong neighborhood, or vice versa!
- WHAT ARE YOUR FUNDING NEEDS: Do you need a loan for land, or construction, or both? What is the length of the loan you are asking for? At iFC, we offer terms of 6 to 24 months and loans up to $10 million dollars.
- KNOW YOUR GOAL: What is your exit plan: are you developing the property for sale, or for rent? Do you have a “Plan B” in case market factors change?
- CHECK YOUR CREDIT SCORE: If you have a lower score, consider bringing in a partner or guarantor who can help you obtain a loan.
- HAVE A DOWN PAYMENT: For New Construction Loans, we can offer up to 90% loan-to-cost up to 80% loan-to-value on a purchase with 100% construction financing. If you already own the land, your down payment may be covered by your equity in the property.
- EXPERIENCE: Some lenders want to see that you have “walked through the fire” with a project, before lending you money. If this is the case, having an experienced general contractor on your project can help you get the funding you need.
- HIRE A QUALIFIED BUILDER: Unless you are a licensed builder, your lender is going to want to know that you have a qualified general contractor on your team.
- PRESENT DETAILED BUILDING PLANS: It is optimal to have a full set of building plans already prepared when you approach your lender.
- BUILD YOUR BUDGET: A realistic budget will have line items for the total estimated project cost, including land acquisition and costs, permits, utilities, construction materials, labor, design fees, legal costs, marketing, and sales costs. It should also include an estimate of your financing fees and interest costs.
- OBTAIN NECESSARY PERMITS: Be sure you understand your zoning permitting process, and the current timing required to move through these processes.
- UNDERSTAND YOUR RISKS: (This is a big one!) Given that cost overruns are the biggest risk in doing new construction, you will need to understand what will happen to your bottom line if material costs increase or decrease, or unexpected costs or issues arise, and how you will compensate for that in your overall budget.
There is a lot to consider when doing a new construction project. Be sure to have an experienced and expert lender to help you through this process. Your lender should be able to review your line items and offer valuable insight about how to configure your funding to make your project most profitable. (For additional information on how to prepare to work with you lender, read this article: How You Can Prep to Help Your Lender Close Faster. )
When comparing lenders, you should look at their loan terms, their interest rates, and repayment plans. However, an important item that is often overlooked is the value of a lender’s experience in the new construction market when it comes to choosing your team.
At iFC, we are experienced investors, and we understand the risks and nuances involved in New Construction Loans. That is how we provide you with the most expert advice and sound guidance possible for this type of loan. Our goal is to be a valuable part of your real estate investing team and to make sure that your project is a success!