How Do New Construction Loans Work for Real Estate Investors?
For most residential real-estate investors, being able to fund and flip multiple fix & flip properties per year is the ideal endgame. For a select few, however, having the option to flip a home you’ve built from the ground up is the pinnacle position that any successful REI investor could hope to be in. With that line of work comes the freedom of creative expression, and the beauty of watching your creation come to life – who doesn’t love a brand-new home?
As with any REI loan, a New Construction Loan is geared towards short-term investors, with the idea that once construction is completed, the home will be sold to a 3rd party, prospective buyer. However, these loans are not to be used for owner-occupied properties – for first-time home buyers looking to purchase a property for themselves, we recommend checking out FHA loans at (https://www.hud.gov/buying/loans.)
New Construction 101
For the truly uninitiated and first-time real estate investor, we’re about to get down to the brass tacks of what it takes to build a home from scratch. I’m not sure what you’ve heard up until now, but new construction homes are an entirely different animal than buying an existing property and giving it cosmetic updates. The reality is, the former is more of a complicated affair compared to a standard F.N.F. loan, and quite frankly it most certainly will be. The real question is, where do you start?
There are many different parameters to consider when getting approved for this type of loan, but all of them are tempered by you and/or your partner(s) credit and personal financial statements, and experience, as well as the yet-to-be-built property, land, and/or location (population density) itself. In other words, every new construction loan is completely unique. Therefore, no two N.C. loans will ever be the same!
To qualify for a new construction loan, you will have to contend with minimum credit score requirements, a 10%-20% down payment of the overall construction costs (and purchase of the land, if applicable,) providing high-quality blueprint plans and specifications, and proving the participation of a licensed general contractor, among other things.
Qualifying Items for New Construction
Important Qualifying Items:
- 620 Min Credit Score
- $40K+ in liquidity (including 10%-20% down payment)
- Professional Blueprints / Plans
- Scope of Work
- General Contractor License copy
- Proof of funds for PITIA (Principle, Interest, Taxes, Insurance and Association fees) – at least 3-6 Months.
How to Get Started
If you’re confident you qualify, please drop us a line by visiting (https://www.ifundrehabs.com/contact-us/). If you’re not entirely sure, I would counter with this: do you currently own any property with equity in it, and/or do you have access to a credit partner with solid financials? If so, drop us a line on that one too!
Since you’re applying for a loan to build a home from the ground up, the bank (that’s us) isn’t able to use the completed property as collateral during the due diligence process, which can make qualifying for the loan a tad bit more difficult. This is part of why the loan costs, interest rates, and overall loan terms are less desirable than a conventional bank loan. On the flip side, this type of loan will fund a lot quicker (2-4 weeks,) and doesn’t have stringent qualifying requirements (ex. a fully executed business plan, PNL statement, etc.) For seasoned investors, this option is most ideal (read: the importance of speed to market.)
If you’re not a licensed General Contractor (GC), you will need to obtain the services of one, and especially so if you have no idea how to fill out a Scope of Work sheet. At this stage of the game, employing a GC is highly recommended since you will need to understand how much the project is going to cost, and if that dollar amount equates to an ARV that is profitable for you.
It goes without saying that you should choose your GC/Home Builder carefully! Things to consider when searching for a good one includes experience building the home you desire in terms of style, size and cost, as well as the builder’s credentials, and personal testimonials of individuals and/or entities that have had homes built by the GC for them in the past. Good reviews only!
During the construction process, your GC will have to apply for draws on the loan (money being taken out in increments, depleted from the total loan amount.) For each draw you will have to provide final inspection reports (conducted by the city and with their own outside costs) that cover different parts of the build process: (ex. structure, plumbing, electrical, etc.) Some investors like to use their own funds up front to make this process go by faster (and also because some N.C. loan products charge a fee per draw,) and so the investor will apply for the draws on their own timetable, or even complete everything out of pocket and only apply for one “final” draw, after using all of their own money, and getting all the required inspections completed. How you strategize that is entirely up to you – some investors love the thrill of maximizing efficiency on draws, whilst some love to shout, “show me the money!” As a side note, building funds will only be distributed in the name of the GC, so its imperative that you use one. Exceptions can be made on a case-by-case basis for investors who have extensive experience in the construction industry.
Thanks for reading our blog on New Construction Loans! Please *CONTACT US* anytime with any questions you may have!