New Construction Financing
New construction financing refers to the process of securing funding to build a new property, whether residential or commercial. This type of financing typically involves two phases: the construction phase and the permanent financing phase.
Construction loans
Short-term loans (usually 6 months to a year) that provide funds to cover the construction costs.
These are typically interest-only loans during the construction phase, with the principal amount due upon completion of the project.
The loan is often converted into a permanent mortgage once the construction is finished, though some loans may require refinancing at that point. A lot of the time a borrower will use private financing for the construction phase because it is easier to obtain and less hassle than going through a bank. Once the construction project is complete the loan can be switched over to a bank or another A lender.
Construction-to-permanent loans
A hybrid loan where the construction loan converts into a permanent mortgage once the home or building is completed.
This type of loan eliminates the need to apply for a separate mortgage, simplifying the process.
Key considerations for new construction financing
Down Payment: Typically ranges from 20% to 30%, depending on the type of loan and the borrower’s financial profile. Equity such as land equity can be used towards the down payment.
Loan Approval Process: Lenders require detailed plans, contractor details, and construction budget, timelines before approving construction financing. The fund cannot be released until the permits are in place.
Disbursement of Funds: Loan funds are often released in stages based on construction milestones (e.g., foundation completion, framing, etc.).
New Construction Financing — Building Dreams from the Ground Up.