When starting your investment property project, you may wonder if you should apply for a new construction loan or a renovation loan. Nearly every single project has aspects of both categories, so you have to determine which loan option is best for your situation.
New Construction Loans
Perfect for instances when you have an idle plot of land or when a property you just bought is better demolished than renovated. New construction loans give you the funds to construct a property you can sell or use as a rental. Because they are perceived to be riskier for lenders, interest rates are given a premium over traditional loans, so expect higher loan rates if you want to apply for a construction loan from your lender. That same reason is why they are also short-term loans and run up to a maximum of 18 months. Lenders also expect the borrower to cover higher equity on the property.
Lenders bet on the completion of the project within the loan term. Thus, funds are released progressively during the construction to ensure project completion. The lender sends an inspector to assess the project and see if the contractor has met a project milestone. Instead of releasing the tranched funds to you, your lender releases them to your contractor.
You only pay the interest charges incurred on the released loans and do not include payments against the principal. Thus, your monthly installments are minimal and do not affect the principal.
What Do New Construction Loans Include?
A new construction loan includes the cost of materials needed and the costs of labor and contractors. Most hard money lenders want you to ideally own the land already and to have the architectural and engineering plans and construction permits in hand. If you don’t, you can also include the land purchase in the loan but it will make the chances of getting your loan much harder. The loan amount is usually 70% of the LTV, which is the appraised value of your property upon project completion.
What New Construction Loan Requirements Do I Prepare?
Requirements for new construction loans do not deviate much between lenders. Hard Money Lenders usually require a construction plan for the project. The plan details the design, all the required work, the contractors, and other parties to the project. You should also prepare a document defining all the materials and labor costs of the project. Aside from these, you will also need to submit the following documents:
- Bank Statements
- Proof Of Employment And Paystubs
- Tax Returns
- Statement Of Assets Or Financial Statements
- Your Credit History
- Identification Documents
- Exit Strategy
Renovation Loans
Essentially also a Construction Loan, a Renovation Loan is like a construction loan that gives you the funds to repair or rehab your existing property. For real estate investors, a renovation loan gives them the means to rehab a decrepit property which they can then sell as a flipper or add to their rental portfolio. The process is almost the same, but for Renovation Loans, you do not have to start from square one. That is because you already have a foundation or structure to begin with that you can improve on. Renovation loans only improve or rehab an existing property structure. Thus, the funds you will need will be less than the amount for building a house from the ground up. In effect, you have fewer interest payments because there will be fewer borrowed funds.
Rates, Terms, and Conditions
Renovation Loans also have higher interest rates when compared to traditional loans because the lender banks on the completion and rehab value of the property. Loan terms are as short as 18 months, but some Hard Money Lenders allow 36-month loan terms. The relatively longer term will give you more time to complete your project. You are also only required to pay the interest charges on the released funds. Funds are released as you reach agreed-upon milestones in the construction period. The requirements you need to submit for renovation loans are the same as new construction loans.
You have to Have Exit Plan Options.
You must have an exit strategy ready if you have signed for either a construction loan or a renovation loan. That is because the loan principal is demandable and payable at the end of the term or construction period, whichever comes first. Here are some examples of Exit Strategies you might want to check out.
Construction to Permanent Loan
This type of loan frees you from applying for another loan at the end of the construction as it automatically shifts to a Permanent Loan. Perfect for people who are investing in rentals, you do not have to pay processing fees and closing fees again. However, this type of loan usually requires high credit scores. As it is offered only by traditional and commercial lenders, expect a conventional processing time.
Convert Your Loan to a Permanent Loan
After the construction period, you have to pay the principal amount you borrowed for the new construction or rehab of your property. This plan works for investors who planned for a rental property or those who can not find a buyer at the end of the renovation loan term. You should note that you must maintain or improve your finances during construction because you will go through the same application process again.
Sell the Property
House Flippers are experts in this strategy. They are well-versed in the changes in the market and know where the real estate markets are hot. In this scenario, your buyers take care of their financing. The funds they borrow will pay off your loan principal and take care of your profit. If there is no buyer for the property, you should consider other options, such as converting it to a rental and applying for a long-term non-owner-occupied home loan.
New Construction or Renovation Loan Lenders
Both Commercial and Hard Money Lenders offer new construction and renovation loans. However, for real estate investors, Hard Money Lenders provide an advantage because they work fast and release funds fast. With other investors also eyeing the property you’re interested in, it pays to have a trusted Hard Money Lender who can help you secure the property as fast as possible.
Hard Money Lenders such as GL&L Holdings, Inc. offer several financing options to help you with your Real Estate Investments and portfolio. Loan programs include Non-Owner Occupied Investment property loans, Rehab Loans, New Construction Loans for additional homes, and Cash-Out refinancing Loans. They are well-versed in the local market because they are local businesses.
Loan Programs Fit to your Needs
Whether you are looking for a Construction or Renovation Loan for your project, GL&L Holdings can accommodate your funding needs. And if you have not yet found a buyer on your flipper, you can also count on us and convert your loan to our Non-Owner Occupied Residential and Commercial Investment Properties Loan Program. Rates are competitive with loan terms that extend to 20 years, so you are not burdened with high amortizations. Call us now at (832) 770-9415 or email us at info@gllholdings.com. You can also apply for a pre-qualification by filling up our online form here.
