BOB THE BUILDER

UNDERSTANDING NEW CONSTRUCTION LOANS

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What are New Construction Loans?

For investors, builders and developers who are looking to build a home from the ground up, or complete a tear-down and gut renovation of an existing structure instead of your average fix and flip, a construction loan for investment property is often the most attractive option. Our New Construction loans offer financing for the acquisition, development, or new construction of ground-up development projects.

A new construction loan is a short-term loan used to finance the construction of a real estate investment property. Loans for construction or renovations, use a portion of the funds to distribute at closing to finance lot acquisition, while the rest is held in escrow. The rehab budget is used to create a draw schedule, which organizes, appoints, and budgets at which stage of the project certain work will be completed. When a particular phase, or draw, is finished,  an inspection is scheduled to confirm the work has been completed. Once the lender receives the confirmation of completion, the funds are distributed. This whole process usually takes about 3 days. This draw process helps both the lender and the borrower by keeping the project on track and within budget.

The Benefits

With most hard/private money loans, the loan amount is based on the as-is house or lot value combined with repair or construction costs. An additional benefit of a hard/private money construction loan is that credit score is not as much of an important factor. However, keep in mind that unlike fix and flip loans, experience is essential for an investment construction loan! 

Any seasoned investor knows how crucial a quick close can be. Real estate investing is a growth industry, and good deals move quickly. A private/hard money new construction loan has a lot less documentation, a significant less mount of underwriting, and it is utilized for its speed 

How do New Construction loans work for investors?

New construction loans for investors work differently compared to those for homeowners. Typically, new build construction loans work using a draw process. The investor will get approved for costs to purchase a lot and pay for construction, but receive only the lot purchase funds at closing. Then they will draw the approved construction funds during the course of the build.

The advantage of this comes when investors get loans where they only pay interest on the drawn balance of the loan. This limits costs early in the project and allows investors flexibility to finance the build as they go. They can draw funds for completed construction as they complete stages of construction such as the foundation or house framing. Managing the construction draw process well can help investors save money in interest. In fact, many investors find this drawn-balance interest (also called commitment funding) a more important loan term than new home construction loan rates are. That’s especially true for investors who own a lot free and clear.

Apex Capital Solutions New Construction loans offer commitment funding and work on a reimbursement model. Our in-house construction management team ensures that construction progress matches the disbursement, which offers an additional layer of security for the investor.