Real estate investors, homeowners, and developers often face one significant question: How do I finance a property I want to build from scratch? Unlike purchasing an existing property, constructing a building from the ground up requires a specialized financing solution: a new construction loan. This guide breaks down everything you need to know about these loans, how they work, and how to maximize their potential to bring your dream project to life.
What Is a New Construction Loan?
A new construction loan is a short-term loan designed to cover the costs of building a property from the ground up. Unlike traditional mortgages, which are structured for buying existing properties, these loans fund every stage of construction, including:
• Land purchase: Financing to acquire the plot where construction will occur.
• Permits and approvals: Ensuring compliance with local regulations.
• Site preparation: Grading, clearing, and preparing the land for building.
• Construction costs: Labor, materials, and equipment for each phase of the project.
• Finishing touches: Interior fixtures, landscaping, and utilities.
What sets these loans apart is their phased disbursement structure. Instead of receiving all the funds upfront, borrowers receive them in “draws” aligned with specific construction milestones, such as completing the foundation, framing, or roofing. This ensures that the financing matches the progress of your project and reduces financial risk for both you and the lender.
Why Choose a New Construction Loan?
New construction loans offer unique benefits tailored to the demands of building from scratch:
1. Phased Funding for Better Cash Flow
With funds released in stages, you only pay for what’s been completed. This phased approach helps you avoid overspending and manage your cash flow effectively.
2. Interest-Only Payments During Construction
While the project is in progress, you only need to pay interest on the amount disbursed, not the entire loan. This keeps monthly payments lower, freeing up resources for construction costs.
3. Tailored to Your Vision
Whether you’re creating a custom home, a multi-family residential development, or a unique commercial property, new construction loans allow for full customization. You’re in control of every detail, from layout and materials to finishes.
4. High Loan-to-Cost Ratios
Many lenders, including Funded Capital, offer up to 90% Loan-to-Cost (LTC), covering a significant portion of your project expenses without stretching your finances too thin.
5. Covers Land and Construction Costs
These loans simplify the process by covering both land acquisition and building expenses under a single agreement, eliminating the need for multiple loans.
Who Can Benefit from a New Construction Loan?
Homeowners: If you’ve always dreamed of designing a home tailored to your needs, a new construction loan can make it happen. This type of loan provides the financial backing to build a property that reflects your lifestyle, preferences, and vision.
Real Estate Investors: For those seeking high ROI, building new properties in high-demand areas often yields better returns than buying existing ones.
Developers: Tackling large-scale projects like multi-family residences, office buildings, or retail spaces? A new construction loan provides the funding you need to scale efficiently and bring ambitious projects to life.
Types of New Construction Loans
1. Construction-to-Permanent Loans
Also called “single-close” loans, these combine the construction loan and permanent mortgage into one. Once construction is complete, the loan transitions to a standard mortgage, streamlining the process and reducing closing costs.
2. Standalone Construction Loans
These are separate short-term loans for construction only. Once the project is complete, the borrower refinances into a permanent mortgage. While this offers flexibility, it involves two sets of closing costs.
3. Owner-Builder Loans
Designed for those who plan to act as their own general contractor, these loans require borrowers to demonstrate significant construction experience.
Key Features of Funded Capital’s New Construction Loan Program
At Funded Capital, we offer competitive and flexible loan solutions to fit your project’s needs:
• Loan Amounts: $50,000 to $3,500,000.
• Loan-to-Cost (LTC): Up to 90% of total project costs.
• Loan-to-ARV (After-Repair Value): Up to 70%.
• Eligible Properties: Non-owner-occupied residential (1-4 units), townhomes, condos.
• Minimum FICO: 680 or higher.
• Developer Experience: At least one similar project for beginners; three or more for experienced developers.
How Do New Construction Loans Work?
1. Application and Approval
To start, you’ll need to meet the lender’s criteria. This includes a strong credit score, proof of financial stability, and detailed construction plans.
2. Phased Disbursements
Funds are released incrementally based on completed milestones. For example:
• Draw 1: Land purchase and site preparation.
• Draw 2: Foundation poured.
• Draw 3: Framing completed.
3. Interest-Only During Construction
You only pay interest on the funds that have been disbursed, not the entire loan amount.
4. Conversion or Refinancing
Once construction is finished, the loan is either paid off or converted into a long-term mortgage.
Steps to Secure a New Construction Loan
1. Define Your Goals: Clearly outline your project, including its purpose, timeline, and budget.
2. Prepare Documentation: Gather detailed construction plans, budgets, permits, and financial statements.
3. Apply for the Loan: Submit your application to Funded Capital with all supporting documents.
4. Undergo Appraisal and Underwriting: Lenders will evaluate your project’s feasibility and financial stability.
5. Disburse Funds and Begin Construction: Funds are released as you complete milestones. Regular inspections ensure compliance with the agreed-upon timeline and quality standards.
Top Tips for Success
Common Challenges and How to Overcome Them
Over-Leveraging: Avoid borrowing more than your budget can handle. Ensure you have a contingency fund for unexpected expenses.
Delays in Construction: Plan for potential delays by building buffer time into your timeline and keeping additional cash reserves.
Prepayment Penalties: Some loans impose penalties for early repayment. Understand these terms upfront to avoid surprises.
Why Choose Funded Capital?
At Funded Capital, we bring years of experience and a client-first approach to financing new construction projects. From competitive terms to personalized support, we’re committed to helping you achieve your vision efficiently and confidently.
Ready to Get Started?
Building your dream property is within reach. With Funded Capital’s New Construction Loan Program, you’ll have the tools and resources you need to succeed. Contact us today to begin your journey toward turning your vision into reality.
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