Construction loans are for home buyers or builders who need short-term cash to finance the construction of a new home, to rehabilitate an existing home, or to restore property. These are typically short-term loans that are meant to be repaid in a year or when construction is complete. Financing can be provided directly to contractors based on a schedule of milestones or all at once. A down payment on the loan of 20% to 25% is often required. To obtain a construction loan, you must have a qualified builder and a detailed construction plan. At the end of the loan term, you may have the option to roll the loan into a mortgage or use funds from the sale of the property to finalize the contract terms.
Construction-Only Loan
A construction-only loan can be used to pay for building or renovating a property, but then must be paid off once the job is completed. Some construction-only loans require the borrower to make only interest payments during the construction period and then expect full payment of the loan when it’s done. Because the incomplete construction project can’t be used as collateral, lenders typically charge a higher interest rate to cover their risk. These loans are tied to the prime rate and could be costlier than a traditional mortgage. Construction-only loans may be used in a way that’s similar to bridge loans in that they can provide short-term funds to cover the gap until longer-term financing is approved.
Construction-To-Permanent Loan
Construction-to-Permanent loans are just like the construction-only loans described above, except that, at the end of the loan period, this loan converts to a mortgage. Once it’s converted, the repayment term becomes much longer. Instead of a year, you can take 15 to 30 years to repay the loan. The payments at that time would be for the principal as well as the interest. The benefit of a construction-to-permanent loan is that you have one loan instead of two. That means you pay closing costs only once. You can also choose to convert to a fixed-rate or adjustable-rate mortgage when you convert the loan. A disadvantage to this type of loan is that, if your financial situation worsens, you may not be able to secure the longer-term funding that would pay for the construction.
Renovation Loan
In the event that a commercial real estate property owner or lessee is conducting tenant improvements to a store, restaurant or other commercial property, and not building from scratch, funds can come in the form of a renovation loan. The loan can be used for expanding rentable space, updating electrical, plumbing systems, commercial kitchen and HVAC, or taking out walls to open up the interior of a retail environment. In this situation, the lender has far less of a part to play in the process. The owner takes the active role of managing the construction and doesn’t have to submit detailed plans to the lender. The amount of the loan request determines what loan options are available. If the amount is minimal, a line of credit or an unsecured loan may be appropriate. Otherwise, the loan might mimic the terms of a CRE term loan or permanent financing.
Development Loans
On a larger scale, development loans focus on commercial development or funding entire subdivisions. They can cover the costs of acquiring the land, the construction of buildings, and the addition of utilities and roads. Loans can be made at any stage from raw land to near completion. Development loans require a large down payment, but can be paid off as individual properties on the land are sold. In some cases, the loan can be secured by already-existing property that the borrower owns. When looking at a potential loan, lenders will review the sale value of the land, the developer’s cash flow, and whether they have an exit plan in place.
Schedule a Consultation
With lenders ready to work with you and with loan amounts from $5,000 to $5 million +, there's no reason not to start a conversation or to pre-apply to see for what loans you could qualify. We work with businesses in every industry and at every stage in the life of your business.
