Are you wondering about how a construction loan works when you own the land? In this article, we have discussed all the critical factors such as the requirements, the steps, etc. Specifically, when you are constructing a commercial or industrial building, you need a hefty amount of funds to complete it. But don’t worry because in certain scenarios you can take construction loans that provide financial support.
The property owners indeed invest a huge amount in the land by considering the best location for their building. But when the construction phase comes, again you have to invest thousands to millions of dollars to complete it! For many owners, it is a dream to build the perfect designed structure for an ideal property.
DISCOVER THE STRATEGIES BEHIND TAKING A CONSTRUCTION LOAN WHEN YOU OWN THE LAND AND GET TO KNOW THE BENEFITS OF SECURING YOUR FINANCING UNDER THE PLANNED TIMELINES!
However, let’s discuss the possibilities of construction loan work when you own the land.
What are construction loans and how do they work?
Remember, a construction loan is like a short-term loan and not like several years of a mortgage. It is only financial support so that you can build the building of your dreams. It is funded in stages which are also known as draws. Rather than paying a lump sum amount, draws are paid throughout the construction process.
In almost every case, construction loans are for one year. When the construction phase is completed the owner has to pay back all the funds.
Steps to Secure a Construction Loan When You Own the Land
1. Know about land value!
In the very first step, you need to determine the land value in the market. If you ask real estate agents or professionals, they can provide you with the exact value and how it contributes to your equity. Anty.
2. You need to develop a construction plan!
The lenders will prepare a detailed plan, which includes all the project drawings and designs. After that, you have to break down the cost of materials and labour and how much time it would take to complete the project.
3. Choose the Right Lender
Ensure to choose the right lender for your loan requirement by discussing the land ownership, terms, and what documents you need to apply.
4. Apply for Pre-Approval
Then you need to submit the financial details including these things:
- Proof of land ownership
- Income statements
- Credit score
- Construction plans and cost estimates which you can achieve from a reputable estimating company.
The main purpose is to get a pre-approval idea of how much you can borrow and the loan conditions you are qualified for!
5. Understand the drawing schedule
Once the process is approved, the lender will see the funds in the form of draws which is directly impacted by the construction progress! The draws appear during the following times of the construction phase!
- Foundation completion
- Framing
- Installation of major systems (plumbing, electrical, etc.)
- Final inspection
What are the Requirements of Construction loan requirements?
- Before taking a loan, you need to understand that you must be capable of taking it. What does that mean? First, you have to be financially stable to ensure the lender that you can repay them in the future. For that, they need proof that you have sufficient income or any assets.
- Secondly, it is important to make a down payment depending on the deal you close with the lender. Usually, the down payment is almost 20% for every project type!
- Thirdly, you must have a detailed and accurate construction plan and timelines. The lenders make sure that you work with a competent company to prevent overspending!
- Fourth, the lenders are concerned with the home appraisal which means whether your property is worth lending the loan or not! They properly review the project plans and other details to know their worth!
Overview of Construction Loan Rates
Average construction loans are 1 percentage point more expensive than traditional mortgage rates.
The construction loans tend to be variable and they usually aren’t fixed like a conventional mortgage, as the interest rate changes! That means your monthly payments too can vary as well, going up or down which usually depends on rate changes.
In addition to that, construction loans are more expensive than your standard mortgage. That’s partly because they’re insecure means if you don’t pay on time, your house is confiscated by the lender. On a home construction loan, that’s not available to the lender so they look at these loans as higher risk.
SO, EXPLORE DIFFERENT OPTIONS FOR YOUR LAND AND TAKE THE FIRST STEP TOWARDS BUILDING YOUR PERFECT PROPERTY, OR CONTACT US FOR A SMOOTH EXECUTION FOR YOUR CONSTRUCTION PROJECT UNDER BUDGET!
Final Words!
In short, a construction loan can be a wise investment for large projects such as commercial and industrial ones. On the other hand, it may become an expensive approach but you can complete your project without having financial issues. With the help of this blog, you can understand how the construction loan works and how you can borrow money. So, with the right approach and exact information, you can complete the projects within timelines and achieve your goals.