New Construction Loans
What is a new construction loan?
It’s a short-term financing solution that allows investors to build a new structure on either shovel-ready land or a tear-down property.
What is the difference between this and a Fix and Flip Loan?
New construction loans are specifically designed for borrowers to build from the ground up. Fix and flip loans are intended for renovation projects. A key difference is in the type of property being purchased. Existing structures that are going to be torn down or empty lots that already have street access, a sewage system, and utilities access qualify for a new construction loan. Existing structures that are being kept but will undergo renovations use a fix and flip loan.
Do you need cash-in-hand?
New construction loans require the borrower to provide at least 25% of the total project cost. If the borrower doesn't have “skin in the game,” lenders would not be able to offer reasonable rates to account for the amount of risk involved in the project.
What are the terms?
These are usually short–term loans, up to 12 months, but often, new construction projects can take more than a year, so loan extensions or longer loan terms can be determined and added to the terms of the loan.
Can these loans be used to build on raw land?
Raw land is not a qualifying property type for a new construction loan. To qualify, the lot must already have street access, a sewage system available, and utilities access. Some investors or developers use different lenders to finance the development of the land. They can refinance the project into a new construction loan once the utilities are in place and the lot becomes eligible.
Are there any prepayment penalties?
Usually there are no prepayment penalties or fees associated with these loans.