7 Questions You Should Ask About New Construction Loans and Ground Up Construction Financing

This year holds great promise for real estate investors who want to build their single-family rental portfolios and/or engage in multiple fix-and-flip projects. As the economy pulls out of a worldwide pandemic, it is likely that the real estate market will pick back up again.

If you’re a real estate investor who wants to make the most of available opportunities, you’ll need to get ready to apply for new construction loans or ground-up construction financing. Before you apply for any such loan, though, there are a few questions you should ask. These seven questions will help you make well-informed decisions about any loan you take out for real estate investing purposes.

1. What Percentage of Construction Funds Can and Should I Borrow?

The answer to this question depends on the lender you’re going through and your individual qualifications. Some lenders offer up to 90% of lot construction and purchase costs. Others may offer up to 100% of construction costs if you own the lot you’re building on. Keep in mind that in order to qualify for these types of loan percentages, you need to have a loan to ARV (after-repair value) ratio of 70%. Here at <company name>, we structure our loans to provide maximum benefits to borrowers.

When calculating your leverage options and deciding what percentage of your construction funds you can and should borrow, remember to consider expected closings costs, loan fee structures and how underwriting requirements apply.

2. What’s the Difference Between a Ground-Up Construction Loan and a Traditional Mortgage?

There are a few key ways ground-up construction loans differ from traditional mortgages. Here are the most notable differences.

  • Ground-up construction loans are only meant to be short-term forms of financing, unlike traditional mortgages.
  • Since construction loans are only short-term notes, you may need to refinance your single-family rental property into a permanent mortgage (unless you own the property outright before starting your construction project).
  • Ground-up construction loans are only designed to cover the costs of construction alone, or both construction and purchase of the property.

Traditional mortgage loans are best for some situations. But if you only need short-term construction financing, a ground-up construction loan is a better option.

3. Do I Need a Detailed Project Plan?

When you’re taking out a new construction loan, you need to submit detailed project plans if you want to maximize your chances of being approved. Different lenders may have different requirements when it comes to how detailed project plans need to be. That’s why it’s best to talk to whichever lender you plan to work with in advance to find out what type of project plan you are expected to submit when you apply for a new construction loan. The more you know about project plan requirements, the easier it will be to close on a new loan as quickly as you can.

4. How Do Construction Draws Work?

The construction draw process differs from lender to lender. So before you apply for a loan, take the time to learn about the documentation you’ll need to present for each draw and what fees are associated with each draw. That way you can take steps to have enough cash on-hand to continue working on your project throughout the draw process.

5. Can I Turn the Property Into a Rental?

If you’re working on a construction project for the purposes of selling, then change your mind and decide to turn the property into a rental, there are some steps you need to take. First, you’ll need to change your construction loan into a permanent loan. You will likely need to consult with your lender to find out what steps you need to take to convert a short-term loan into a long-term loan. Knowing your loan conversion options will help you make the most informed decision about the property in question.

6. Are There Penalties if My Project Runs Over the Estimated Timeline?

If your project takes longer than expected and you need to extend financing past the original estimated timeline, you could be subject to loan extension fees and penalties. Of course, this all depends on the lender you go through. Some lenders charge more in fees than others.

Since it’s impossible to avoid some types of delays, including delays due to inclement weather, it’s wise to ask your lender about any extension fees and penalties in advance. You always want to know what will happen if you have to push your timeline out for any reason.

7. How Can I Get Support Throughout My Project?

When selecting a lender for your loan needs, find out if they offer any services that can help your project run smoothly. You’re more likely to be well cared for if you get a loan from a lender that handles the construction draw process and services the loan instead of having a third party manage your affairs.

Do you still have questions about ground-up construction financing? Get in touch with the team at HML Solutions today and we’ll be happy to answer your questions.