In today’s video, Kris Adey and I continue our Real Estate Investing series, and we talk about how you can pay for your real estate investments, and by that we mean the mechanism. This is an introduction to construction loans.

Construction loans are different than a normal mortgage.

They have a shorter term, higher interest rate, and cover the cost of building or renovating a home.
The loan is paid to the contractor, not the borrower in installments, also known as draws, as the builder reaches different milestones. At the end of the construction, the loan is either paid off or is converted to a traditional permanent mortgage.

Types of Construction Loans:

Construction-to-permanent:

Converts to a permanent mortgage

Construction only:

Paid off when the building is complete

Renovation construction loan:

Costs of major renovations are wrapped into the mortgage rather than financed afterward in draws. Two of the common programs are Fannie Mae’s HomeStyle Renovation Mortgage and FHA’s 203k loan.

What Your Lender Needs to See:

A lender is going to want to see your financial information, know who your builder will be so they can check them out, and they will review your architectural plans.

A lender may request your builder’s work history and proof of insurance, blueprints, specifications, a materials list, a detailed budget and a signed construction contract that includes start and finish dates.

They will also want to have a projection/appraisal of finished value.