How to get a construction loan for investment property

Renovation loans, or construction loans, can be used for a number of projects, but almost always allow the user to customize their space or property. Anyone interested in new construction or a big renovation should look into this as a viable financing option. Keep reading to learn if these loans are right for you, and learn how you can qualify.

What Are Construction Loans?

Construction loans are short-term financing options for new real estate or renovation projects. They are used to pay for the costs of building a new house or for upgrading an existing property. Construction loans are only applicable for the time it takes to complete the project, and users only borrow what they need. These loans are distributed directly to the contractor (instead of the borrower) in segments called “draws.” Draws are marked as certain elements of the project are completed, such as the foundation being poured or the frame being built. 

The main appeal of construction loans is that they enable homebuyers or investors to build a new property; though, the freedom to customize a property does come at a cost. For example, construction loans are known to have higher than average interest rates. The structure is typically set up to protect lenders who trust that a project will be completed correctly, and that it will be worth a certain amount when done. Homeowners should not rule this option out, however, because there are a number of perks to this form of financing. 

What Can A Construction Loan Be Used For?

A construction loan can be used for a number of projects, depending on your lenders’ requirements and terms of agreement. Here are a few of the ways to utilize an investment property construction loan:

• Purchasing raw land

• Pouring foundation

• Building an addition to a property

• Framing and finishing a house

• Building sheds or other structures

• Adding a garage

What’s The Difference Between A Construction Loan And A Home Loan?

A construction loan and a home loan are different in terms of what they can be used for; and as such, the approval requirements will be slightly different for each. A construction loan is used to build new structures or renovate existing ones, while a home loan is just a traditional mortgage. Both types of financing will require a credit check and other financial information, but a construction loan will also require the project plans to be approved before the loan is issued. 

Additionally, construction loans can only be used for the duration of the project. Home loans, on the other hand, are issued for a set period of time until they are paid off. Borrowers who rely on construction loans will typically refinance their property after the project is completed, and enter a more traditional loan. To do so, homeowners will go through a property inspection and appraisal. 

What’s The Difference Between A Construction Loan And A Renovation Loan?

The difference between construction loans and renovation loans lies in the type of project. Construction loans are used for new properties with definitive project plans. Those who use construction loans will also typically transition into a regular mortgage at the end of the construction project. In contrast, renovation loans for investors are used to purchase fixer uppers or to renovate existing properties. These loans can be used for both cosmetic and structural fixes, like insulating a house or upgrading a kitchen.

Can You Get a Construction Loan For An Investment Property?

Yes. You can get a construction loan for an investment property, as long as your project plans and finances meet designated lender requirements. Unlike some home loans, there is no process stating that a construction loan must be applied to a primary residence. In fact, construction loans can be a great option for financing an investment property for a number of reasons. Most notably, real estate investors likely have experience working with contractors and supervising renovation projects already. Therefore, they may be well suited to oversee the construction of a new property. 

There are also renovation loans for investment property that can be obtained by following a similar approval process. Investors interested in a renovation construction loan will find that the loan is distributed based on the after repair value of the property in question. This is where your investor tool kit will come in handy. Rely on a good rental property calculator and contractor when determining whether or not a renovation loan is the right move for a specific project. 

How To Qualify For A Construction Loan

To qualify for a construction loan, borrowers must meet a number of financial requirements in addition to having their project plans approved. To begin, lenders will typically review your debt-to-income ratio and credit. While the specific requirements vary based on your lender, many ask for a credit score of 650 or more. Borrowers must also have a down payment when setting up a construction loan, which should usually be between 20 and 30 percent. Make sure you shop around when searching for a lender; there are numerous options available for obtaining a construction loan and each will come with different requirements. 

In order to get the final approval for a construction or renovation loan, you must also submit the construction plans for the project. Lenders will want to see detailed plans for the property, and a team of qualified builders attached to the project. It is important to know that while you do need finished plans for the final loan approval, you can get preapproved for a construction loan before buying a property. 

Summary

The idea of customizing a property from start to finish may seem impossible, both for homeowners and investors. However, this is not the case. With financing options like construction and renovation loans, building a new property does not have to be a distant dream. While there are approval requirements to this form of financing, it can open new doors to anyone interested purchasing raw land or fixer uppers. Consider a construction or renovation loan next time you plan a project, it might lead to amazing results.