When you are in the market for a new construction home, there are several different ways that you can finance the purchase. You can get a mortgage from a bank, you can get a government loan, or you can use a hard money loan to finance the construction.
Hard money loans are financed by private investors, and they are usually used to finance short-term projects, like new construction. The interest rates on hard money loans are usually higher than the interest rates on traditional loans, but they are also much faster to obtain.
Different Types of Construction Loans
There are a variety of different loans that you can use to finance the construction of your new home. Here are a few of the most common types of construction loans:
Construction-to-permanent loan: A construction-to-permanent loan is a loan that is used finance both the construction and the purchase of your home. This type of loan is usually a fixed-rate loan, and it will have a short-term interest rate. Once your home build is complete, the loan will automatically convert to a long-term mortgage.
Permanent mortgage: A permanent mortgage is a mortgage that will be used to finance the purchase of your home. This type of loan is usually a fixed-rate loan, and it will have a long-term interest rate. Once your home is completed, the loan will automatically convert to a permanent mortgage.
Renovation Loans: If you are planning to make upgrades to your existing home, you may want to consider taking out a renovation loan, as they are specifically designed for this purpose. The interest rates on renovation loans are usually lower than the interest rates on traditional loans, and they are also much faster to obtain. Plus, renovation loans can be used to finance a wide variety of different types of home upgrades.
Construction-only loans: Construction-only loans are specifically designed for people who are financing the construction of their home. If you are only interested in financing the construction of your new home, you may want to consider taking out a construction-only loan.
The Pros of Getting a Hard Money Loan
There are several reasons why you should consider getting a hard money loan instead of a mortgage from a bank. Here are the key benefits this lending option offers to investors:
Quick turnaround times: The approval and funding processes for hard money loans are typically much faster than the same processes for a traditional loan. In fact, the hard money loan approval process can happen in as quickly as one day! Because the lender is mainly interested in your posted collateral, other considerations such as tax forms, bank statements, and credit reports are largely negligible.
Flexible terms: Because hard money loans are approved on a case-by-case basis by individuals or private companies, there is much more room for negotiation than with a traditional loan. This means that it may be possible to adjust the repayment schedule and the duration of the loan to fit your specific needs.
Few requirements: Hard money lenders have far fewer requirements than bank lenders. These requirements include: that the borrower has enough equity in the property (at least 25-30%), sufficient funds to make monthly payments, and a sensible exit strategy. Other factors that banks consider before approving a loan – such as a borrower’s credit score, employment history, and any recent foreclosures – are not considered in the hard money loan process. Because of this, the likelihood of qualifying for a hard money loan is often substantially higher than for a traditional loan from a bank.