Construction Loans

Building a new property from the ground up is prohibitively expensive out-of-pocket, which is why companies often seek construction loans. Real estate construction loans are complex agreements between borrowers and lenders to provide long-term financing for new construction projects. Rather than paying a lump sum upfront, the lender issues payments based on a pre-approved timeline and set of milestones
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Lean More About Construction Loans

Typically, if a business wants to purchase real estate, it will secure financing to obtain an existing structure. However, developing a new property can offer several benefits, such as more significant equity in the building and the ability to design it however the company sees fit.

Unfortunately, construction projects are costly, which is why a traditional loan doesn’t always work. Instead, borrowers work with lenders that specialize in real estate construction loans.

To qualify for financing, the business has to work closely with the lender and the construction crew. All parties involved must agree on a timeline and plan of action. During the project, the lender will issue funds based on the timeline’s milestones. Usually, construction loans offer immediate financing to pay for things like zoning permits and excavation, then pay more as the project moves forward.

During construction, the borrower makes interest-only payments on the loan. Once development is complete, the lender requires payment of the remaining balance in a lump sum. Alternatively, the borrower can roll the loan into a mortgage to mitigate this cost.

Loan Highlights

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Borrowers must submit a development plan to the lender to qualify for this loan
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Construction financing can be used for new buildings or to renovate existing ones.
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Loan payments are interest-only until the project is complete
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Lenders issue funds based on milestones, which can help alleviate the cost of delays
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Usually, borrowers will convert a construction loan into a mortgage once development is complete

Construction Pros and Cons

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Construction loans offer more flexibility than other forms of financing
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Loans can be converted into a mortgage to cover a balloon payment
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If the borrower has a strong credit history, construction loans are easier to qualify for because the building acts as collateral
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Construction planning has to be submitted to qualify for a loan
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If there are delays in construction, the borrower still has to make interest payments
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Interest rates for these loans are higher than other forms of financing
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