A Guide to the Different Types of Construction Loans

Most businesses move from an existing building to a newly built one at some point. You may even want to start your business from scratch. Regardless of the scenario, building or starting a new business is expensive.

You might need to access quick and easy capital for your construction project. You may consider a construction loan as an option.

There are different types of construction loans available. Below is a guide to the most common construction loan types. Keep reading to learn which one is right for your business.

A Guide to the Different Types of Construction Loans

Construction-To-Permanent Loan

This is a type of loan that bridges the gap between construction and permanent financing. These loans are made for those who are constructing a new home or renovating an existing one.

With this loan, funds can be accessed during the construction phase. They are converted into a permanent loan once the home is completed and ready for occupancy. This allows for better control of the budget and reduces the need for multiple loans.

The lender manages the process from beginning to end. This sets aside a portion of the loan funds for the permanent loan that will be established at the end of the construction phase. Construction-To-Permanent loans often come with flexible repayment terms. It also comes with attractive interest rates and a loan amount based on the appraisal and construction cost of the project.

Construction-Only Loan

This, also referred to as a “one-time close” loan, is a loan used to pay construction projects. It basically combines the cost of construction with the cost of the loan. The borrower agrees to repay the full loan amount at the close of the loan once construction and renovations are finished.

This loan choice is popular for individuals building their own homes from scratch. This is also for existing homeowners making big renovations or additions to their homes.

Construction Only Loans provide borrowers with instant access to funds. They can use this to fund the cost of building/renovations. This way, there is no need to wait until after the job is done to pay for the construction costs.

Renovation Loan

This is a type of construction loan designed specifically for financing home renovations and repairs. It can be used to fund a variety of renovations. This includes kitchen remodels, bathroom updates, exterior makeovers, and more. It offers a variety of benefits for homeowners.

With a renovation loan, borrowers are able to combine the cost of the renovations into one loan. This removes the need to take out multiple loans when making updates to their homes.

These loans also have longer repayment terms than traditional construction loans. It allows the borrower to spread the cost out over a longer period of time, as well as have access to more forgiving interest rates.

The loan can also be used to cover repair costs for existing issues, such as foundation or plumbing issues, which often have to be done in order for the project to be eligible.

Owner-Builder Construction Loan

Owner-Builder Construction Loan is a type of finance solution often used by experienced builders and developers, which can enable those with the relevant experience and expertise to construct a building.

These loans can vary in terms of length and amount, depending on the scale of the project; however, they typically have a higher interest rate than a typical mortgage. Additionally, it is likely that the borrower may have to put down a larger deposit for an owner-builder construction loan, making it better suited to those with a high level of financial security.

It can also be consummated through a partnership, creating a joint venture to secure finance for the construction project. Although the borrower is required to pay a higher rate of interest when applying for an owner-builder construction loan, this type of finance solution may be the only option for experienced builders and developers who need to build their own property.

End Loan

An End Loan, otherwise known as a Takeout Loan, is one of the loan options that is taken out on a piece of real estate after construction is complete and the development is ready for occupancy or sale.

An end loan is meant to “take out” or replace the original construction loan. It typically has a five to thirty-year term and a fixed or adjustable rate option. Qualifying for an End Loan requires extensive creditworthiness and a proven track record of professional success.

The borrower must also demonstrate steady income with adequate resources to make payments for the full loan term. End loans are attractive to developers since they can provide the long-term stability and predictability necessary to help finance the continued profitability of projects.

Fix and Flip Loans

Fix and flip loans are short-term loans ideal for investors who want to purchase, renovate, and then sell an income-producing real estate investment for a profit. These types of construction loans are typically offered at a high-interest rate and with a short-term tenure due to the short-term nature of the loan.

Typically, the loan amount must be paid off in 12 months or less, and then the investor must pay off the loan in full. This type of loan is also referred to as a bridge loan since it is “bridging” the gap while the investor completes the sale of the renovated property. Fix and flip loans are perfect for real estate investors who have a vision and a short timeline in which to complete a successful flip.

Learn More About the Types Of Construction Loans

Construction loans can be a great way to finance a brand-new property or to help finance a remodel. There are different types of construction loans out there to fit almost any need, so investigate what type of loan may work best for you.

Don’t forget to read the fine print, and consider talking to a professional for advice. Interested in finding out more? Contact a local lender today to start the process.

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