Getting a construction loan might seem daunting, but once you understand the requirements, it can be simpler and more profitable than you think.
At ABL, we provide construction loans for fix-and-flips and new builds. Whether you’re an experienced builder or just starting out, we can help you secure the financing you need to get your next project off the ground and boost your final returns.
What Is a Construction Loan?
A construction loan is a short-term loan for financing the building or renovation of real estate. It’s designed to cover construction costs only. However, once construction is complete, the loan is often refinanced into a more traditional long-term mortgage. At ABL, for example, you can seamlessly transition from a construction loan to a 30-year mortgage.
Types of Construction Loans
For real estate investors, there are two main types of construction loans:
- New construction loans are for building properties from the ground up. ABL’s new construction loans have 12-24-month terms and can finance up to 70% of the land purchase and 100% of the construction costs.
- Fix-and-flip loans are for renovating distressed properties. ABL’s fix-and-flip loans have 12-24-month terms and can finance up to 92.5% of the total project cost, including the property purchase and construction costs.
Benefits of Construction Loans
While you don’t necessarily need a construction loan to build or renovate a property, there are many good reasons to get one.
Lower Upfront Costs
With a construction loan, you don’t have to wait until you have the cash to buy a property and pay a builder. Instead, you can seize development opportunities by putting down a fraction of the total project cost.
Flexible Draw Schedules
Lenders like ABL offer flexible draw schedules tied to construction milestones. For example, you may be able to request draws after completing the foundation, framing, drywall, etc. That way, you always have the necessary funding to keep the project moving forward.
Interest-Only Payments
With many construction loans, you make interest-only payments during construction, and the principal isn’t due until the loan matures. That way, you can maximize your cash flow during the most cost-intensive phase of the project.
Positive Leverage
Even if you have the capital to pay for a construction project outright, a construction loan can be a smart way to boost your returns through positive leverage. Generally, if the interest rate is lower than the project’s ROI, you stand to gain by financing it.
Common Construction Loan Requirements
To qualify for a construction loan, you must meet certain loan requirements:
- Credit score. Most lenders require you to have a minimum credit score. At ABL, it’s 660.
- Loan size. Lenders set limits on how much they’re willing to lend per loan. You can borrow anywhere from $75K to $50M from ABL for construction projects.
- Loan term. The loan term determines how long you have to repay the loan. ABL construction loans are available for 12-24 months.
- Property type. Lenders won’t finance any property. ABL only finances the construction or renovation of single-family homes, multifamily properties, or condos.
- Experience. Depending on the project, you may need to demonstrate past building experience. For example, ABL only issues new construction loans to experienced investors. However, you can get an ABL fix-and-flip loan at any experience level.
Common Construction Loan Terms
On top of meeting the basic loan requirements, you must agree to the construction loan terms:
- Down payment. Most lenders require you to put down a certain percentage of the project’s after-repair value (ARV). At ABL, you must put down 30% of the ARV.
- Interest rate. Interest is the cost of borrowing. The higher the interest rate, the more expensive the loan. ABL fix-and-flip loans have rates of 8-15%, and ABL new construction loans have rates of 9.99-16%.
- Fees. Lenders often charge application, origination, and other fees. Carefully review the fine print to understand the full cost of the loan. ABL’s origination fees range from 0-2%.
- Prepayment penalty. Some lenders charge a prepayment penalty if you pay off the loan early. Not at ABL. We let you keep any interest savings from finishing early.
- Repayment structure. Construction loan repayments can be structured in many ways. At ABL, we only charge interest during the loan term, with the principal due at maturity.
5 Tips to Meet Construction Loan Requirements
Now that you know the typical requirements and terms of construction loans, here are some final tips to boost your chances of qualifying for one with attractive terms:
Have a Solid Exit Strategy
Lenders want to know that you’ll repay the loan in full and on time. Reassure them you will by presenting a solid exit strategy that shows how you plan to sell the property for a profit or turn it into a long-term rental with permanent financing.
Improve Your Credit Score
The higher your credit score, the more confident a lender will be in your ability to repay the loan. Improve your credit score by paying off debt on time, maintaining a low credit utilization ratio, and limiting new credit inquiries before applying for a new construction loan.
Make a High Down Payment
A down payment shows you have skin in the game. The higher it is, the more confident the lender will be that you won’t walk away from your equity by defaulting. That’s why you can always mitigate weaker areas of your borrower profile with a higher down payment.
Demonstrate a Strong Track Record
Construction projects can be complex. Borrowers who have a strong track record of successful builds in the past are more likely to qualify for a construction loan with attractive terms.
Get Your Finances in Order
Don’t wait until the last minute to get your financial documents in order. Most lenders require proof of credit history, income, and existing debt before extending new credit. By having the required documents ready, you’ll avoid wasting time during the underwriting process.
Partner with ABL
Getting a construction loan could make or break your next investment. Before diving too deep into a potential deal, check to see if you qualify. At ABL, we offer fast, flexible financing for fix-and-flip and new construction projects nationwide. Pre-qualify today!