Exploring the Different Types of Construction Loans

The construction industry is responsible for nearly $1.8 trillion of new properties each year. As you might expect, many of these new construction projects are made possible thanks to lending. 

If you are getting ready to put together a new building project but aren’t sure how to get started, it pays to look into the many different lending options available. 

In this article, you’ll learn all about the various construction loans available to you.

The Different Types of Construction Loans

As with any area of business, there are different classifications for loans that you can look into. These loans differ based on residential, commercial, and industrial loans. 

Many people look into building a new home that they can live in for years to come. Knowing the type of loan you need will help you figure out which terms are ideal for your project.  

Construction-Only Loans

These are among the most popular and common home construction loans available. A construction-only loan provides the borrower the money that they need to complete the construction of the project, but then requires them to either pay the loan themselves or take out a mortgage to secure it. 

Money from these loans is allocated in stages as the project progresses. In the meantime, the person buying the home will be responsible for the interest payments that accrue. 

Fix and Flip Loans

If you’d like to earn a profit with your building project, fix and flip loans could provide an excellent option. These are loans of the short-term variety that allow you to renovate, remodel, or otherwise modify a home that you’re going to put on the market. 

You can also use it to buy or build new properties that you are going to flip short-term. These are essentially small business loans that are created specifically for real estate transactions.  

Make sure that you take care of your funding application and secure your loan well in advance if you’re considering flipping houses as an investor.  

Owner-Builder Loans

These loans are in place for home buyers who also want to act as their own builder. They are for people with experience with these projects who know exactly what they are going to do with the funding once they receive it. 

In many situations, you will need to prove that you are a licensed and insured builder with experience in the industry. The reason for this is that you will be required to keep up with a variety of building and construction codes throughout the project. 

The lending company will need to know that the project is moving along in accordance with local laws and regulations without setbacks in the process.  

Renovation Loans

This is a type of real estate loan that is put into place specifically for people intending to carry out renovations. Renovations are often made to add more equity to a property so that owners can get a return on investment (ROI) via a sale, or just to make their real estate portfolio more substantial. 

During the lending process, you will be asked to lay out the details of the renovation project so that the company knows how the funds will be used and how much time you will need to pay it back.  

Construction-to-Permanent Loans

Construction-to-permanent loans are loans that pay the cost of building a home. Once the project is cleared for occupancy and you move in, it will immediately be converted into a home mortgage. 

These are the loans of choice for people who are building their dream homes and want a seamless way to make that happen. You will appreciate getting both loans under one umbrella and from the same company. 

This allows for continuity and minimizes any discrepancies or delays that you might otherwise experience when seeking construction loans.  

How to Get the Best Construction Loan

There are several things you can do to make sure you find the best possible loans for your needs. By getting to know your project and weighing all of the variables, you’ll get the ideal agreement, receive your payment quicker, and will be better able to honor the loan. 

First, assess your project and consider how much money you need. You can use a construction loan calculator that breaks down the numbers and also factors in interest and other variables. 

Next, make sure that you consider your creditworthiness to make sure that you are open to the best terms available. Look into current construction loan rates to see how much you might expect to receive and how much you’ll have to pay back long-term. 

Study the company that’s offering the loan to make sure that they do business with transparency and care. Avoid the temptation to take out more money than you need to so that you don’t find yourself in a financial bind.  

Find the Construction Loans You Need

These tips will help you when you are looking into getting construction loans. Whenever you are in need of some money to bring your next big build to fruition, you can’t go wrong with the information above. 

Thankfully, there are also several different financial companies that you can turn to the next time that you are looking to finance a construction project. 

Merchants Mortgage and Trust Corporation would love to hear more about your project to show you why we’re the premier company for construction lending.  

Reach out to get pre-approved and don’t hesitate to call one of our local agents for more information. 

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