A construction loan is a product that can paint a very broad stroke for the different loan types available. It can be used to do simple renovations from new bathrooms and a kitchen upgrade to building a home from the ground up. Money for these projects may come from equity you already have in your property or equity you hope to create by your build out. Depending on the scope of your project this can create completely different scenarios from one project to the other and no two projects will ever be exactly alike.
Who is it right for?
A Construction Loan is ideal for:
- The existing homeowner who wants to add value to their home.
- The purchaser who wants to build the custom home they always wanted.
- The investor who put a big down payment down to buy the property that they wish to renovate and then resell.
Existing Equity Loans
These are typically the easiest loans to come by. Our loan may come from a variety of sources including a new first mortgage, a new second mortgage or both. The new mortgages may be a conventional product or a nonconforming product and the second trusts may be a loan or a credit line. All will have loan to value restrictions based on the guidelines allowed by those products. The biggest benefit these products offer is the potential to be the only loan you need for your project.
Future Value Loans
As the heading implies the future value of your completed project will greatly influence the product and loan type available to you as well as how much you can borrow to complete you project. Much like Existing Equity Loans the future value loans have loan to value limits or “caps.” Their advantage relies on the “As Completed Value” of the appraisal that will take into account the overall scope of work and comparable sales of similar size and appeal to your home once the project is done. This will greatly influence the final value and what can be borrowed.
In most cases, the loan type for the Future Value Loans will be of short duration and come with upfront fees and schedules that must be adhered to draw more money out of the loan for the project. While this may add to the cost of the project, it is necessary to protect both the lender and the client from the builder falling behind or misappropriating funds. Because of the short duration of the loan (typically somewhere between 6 and 18 months) and lack of conversion with most of these loan types, a refinance, typically referred to as “take out financing,” must be put in place to remove these loans once the project is completed.
Because of the specialized nature of these loan types and overall scope of the project it is very important to have your project addressed individually.
|Customize your home to what you want and can afford.|
|No settling for builder grade materials.|
|Working on a tight budget can be problematic for any delays or cost overruns.|
|A rule of thumb says you should prepare for as much as 20% over your estimate for your project.|
Costs Associated with Construction
|Better use of the equity in your home without having to pay any realtor commissions or other closing costs associated with moving.|
|You can control the costs by picking out items that fit your wants and needs.|
|If you cannot live in your home during renovation you will have to rent another home, increasing the overall costs of the project.|
|If what you pick out does not work you may be adding to the cost of the project with change orders to the builder.|
Stay or Go
|Stay in your home longer, especially nice if you're fond of your neighborhood.|
|The cost to renovate may exceed what you get back in value. You can possibly over build for your neighborhood. It might be easier and more cost effective to buy a new home.|
|Keep your existing interest rate (as applicable) giving you cost certainty.|
|You might not be able to keep your current low rate and would be subject to the market conditions at the time of completion for your take out financing.|