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For most people, the process of financing a new construction project can seem daunting, especially if they are more familiar with traditional home-buying. The requirements for a conventional mortgage—such as a stable income, good credit, and a down payment—are not the same when you're developing a new construction or an investment property. These projects require specialized financing options with different terms and conditions designed for real estate developers and investors.
The Difference Between Traditional Home Loans and New Construction Financing
When purchasing an existing home, buyers can often choose from a wide range of mortgage products, each with specific guidelines tailored to the buyer’s unique financial situation. However, financing a new construction development is quite different. Traditional mortgage products are typically not suitable for new construction, as they are structured for properties that are already built and ready to be occupied.
For new construction developments, you will likely need to pursue a construction loan, and in many cases, a hard money loan is the most practical option for investors or developers. Hard money loans offer flexibility but come with different expectations and requirements.
Hard Money Loans and Buildable Projects
Most hard money lenders will only lend on projects that are considered "buildable." In other words, the land must be fully prepped for construction by the time the loan closes. This means that all necessary pre-construction work—such as land development, plan design, and securing city permits and approvals—must be completed before the lender will fund a project. Once the loan is approved and closed, construction should be able to start immediately.
This upfront preparation is crucial, as lenders need to ensure that their investment will move quickly from planning to execution. If you haven't completed these steps, it's best to delay financing applications until you can present a project that is ready for the next phase.
What Lenders Look for in New Construction Loans
When it comes to new construction financing, there are a few consistent factors that hard money lenders assess:
Loan-to-Value (LTV) Ratio: Most lenders will provide financing up to 70% of the After Repair Value (ARV), which represents the projected market value of the property once construction is complete. At bttrbuild, we call this the After bttrbuild Value (ABV).
Cost Coverage: In addition to the LTV ratio, lenders may cover up to 90% of your construction costs, but this varies by lender. If you already own the land outright, you may find that your financing needs are minimal, allowing you to close your loan with little or no upfront cash.
Experience and Project Viability: Lenders often look for experienced developers with a clear, viable project plan. This includes detailed construction timelines, a thorough budget, and evidence that your project can generate the expected returns.
Simplifying the Financing Process
While new construction financing might seem more complex than a traditional home loan, it is widely accessible, with many hard money lenders offering straightforward terms and conditions for qualified developers. As long as you have a project that’s ready to build and you meet the financial requirements, obtaining a loan to get started is a relatively smooth process.
Additionally, once you partner with bttrbuild, we’ll provide more detailed insights into the financing process, helping you break down the numbers and understand exactly what you'll need to bring your project to life.
Ready to Get Started?
If you're ready to start your new construction project or want to learn more about how bttrbuild can help you secure financing and manage your development, we’re here to guide you every step of the way. Schedule a call today for personalized advice and to take the next step toward turning your vision into reality!
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