7 Questions to Ask Before Getting a Construction Loan

There are different types of loans for almost any project, investment, or endeavor you can make. However, getting a loan is not always easy, especially during such uncertain economic times. Believe it or not, loans have declined by over $105 billion from the largest banks due to rising interest rates.

Fortunately, that doesn’t mean your project is doomed if you know where to look. Here are some questions to ask before getting a construction loan when you need it!

1. Is Getting a Construction Loan Right for Me?

You can ask this question to your potential lender or to yourself. There are plenty of financing options available to those in need, and some may be more advantageous than others.

For example, if you’re carrying out a limited project, a personal loan may be a better option. The interest rates will be higher, but you’ll have a shorter term and still have manageable payments. A mortgage may be right if you need to purchase the property and fix it up, but most fixer-uppers won’t qualify for federally-backed mortgages.

However, if you have a lot of work to do, especially if you need to purchase the property, a construction loan is likely the best solution. It will have better interest rates and your project will be far more eligible for the loan.

2. What Is the Maximum Loan Amount?

Ask your potential lender about the maximum loan amount for your construction loan. Understanding this potential loan amount is essential for determining your overall budget for the project.

If you’ve spoken with an architect and/or project manager already, then you likely have an estimate for the total project cost. If this doesn’t align with your maximum loan value, then you may need to look for alternative funding or a different project altogether. However, there are other potential options.

3. What Happens If I Go Over Budget?

Nothing ever goes exactly to plan, does it? That’s why you need to prepare in advance. Always seek a maximum loan that’s around 10% above your estimated budget.

Still, it’s possible to exceed that threshold. Make sure you talk to your lender ahead of time to determine what will happen if the project does go over budget.

In some cases, you may be able to supplement the loan, take out a separate line of credit, or add to it. However, if none of these options are available, you could find yourself in a difficult position if challenges arise. Prepare for these possibilities before taking out a loan.

4. What Is the Payment Structure?

There are different types of construction loans available. Some may offer regular installment payments for investment rentals or personal homes while others may offer a lump sum payment if you plan to resell the property for a profit. The latter are known as bridge loans or fix-and-flip loans.

Essentially, you receive the necessary funding for your project, and payments are deferred for up to 18 months, depending on the lender. Once the project is complete and you resell, you will then have to pay back the loan with the agreed-upon interest rate.

However, these loans are designed specifically for renovations. This means they aren’t designed to cover the full cost of a house. Therefore, if you’re building a new project from scratch, you’ll need a different loan.

If you need to build a house or multifamily building from scratch, you’ll need a ground-up construction loan. Typically, these will fund up to 80% of the construction costs and offer deferred payments until the project is complete. This is ideal for developers intending to rent out and/or live in the property.

5. What Loan Term Is Right for Me?

For ground-up construction loans or other installment loans, how long do you plan to pay it down? It may be nice to pay down a loan in ten years, but is that feasible for the income you’ll receive?

Most lenders will offer options in 5-year increments, but these will come with different terms. For example, a 15-year loan will likely have a higher interest rate than a 30-year loan, as it’s a greater risk to the lender. You can use a payment calculator to get a rough idea of your monthly payments.

Whatever you choose, make sure you can afford the payments over the long term. Numbers may work out on paper, but a recession, a natural disaster, or even a few bad tenants can put you in a tight spot. Always keep extra funds on hand to continue making payments and make sure you can afford your loan ahead of time!

6. What Extra Fees Do You Charge?

Nearly every lender charges fees beyond their standard interest rates. It’s important to read the fine print and determine which fees will apply to you.

Some of them may not apply to you at all. For example, there may be late payment fees, early closing fees, or others that may not affect you. However, it’s still important to know which ones will before signing onto such a long-term commitment.

Apply for a Loan Today

Getting a construction loan is a great way to invest in a new property or fix up an existing one. It can give you the funding you need for your project now so that you can enjoy a nice return later on.

Real estate is a great industry to invest in, whether you plan to rent, resell, or hold for yourself. What other investment grants you so much control for only 20% down?

Keep reading our blog for our latest financial tips, and don’t hesitate to contact us with any questions or for help finding a loan that’s right for you

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