If you’re building from the ground up, a standard mortgage won’t work. A mortgage is designed for a house that already exists. A construction loan is designed for one that doesn’t yet, and it pays for the work as the building goes up.
Here’s how construction loans work and when one makes sense.
What is a construction loan?
A construction loan is short-term financing that covers the cost of building a home, adding to an existing one, or completing another real estate project. It gets the job started and keeps it funded until the work is finished and long-term financing or a sale takes over.
There are three common types:
- Construction-only. The loan covers the build and is paid off in full when the project is done, usually through a sale or a refinance. Builders and investors use these when they expect to sell soon after completion.
- Construction-to-permanent. The builder is paid in stages as work is completed. When construction ends, the loan converts into a regular mortgage.
- Renovation loans. These are for buying and repairing a fixer-upper. The lender looks at the purchase price, the cost of the work and what the property should be worth afterward.
When a construction loan makes sense
You want to start soon
Construction loans are short-term, and private lenders can usually approve them faster than a bank. That means you can pay for materials and get your builder on site while the weather and the market are on your side.
You’re working against a deadline
Sometimes the deadline is your own. Sometimes it’s written into a contract with a buyer or a landowner. Either way, funds are released as the project moves along, so the work doesn’t stall while paperwork catches up.
You plan to sell or refinance when it’s done
If you’re a builder or investor planning to sell the finished property, a construction-only loan matches the life of the project. You borrow for the build and pay it back at the sale.
What lenders look at
Before approving a construction loan, expect a lender to review your plans and budget, your experience with similar projects, the value of the finished property, and how you intend to repay. Having those ready speeds things up considerably.
Building with Sachem Lending
Sachem Lending makes new construction loans to builders and developers, and we also finance entitled land development. Our FAQs cover common questions about terms and timing. Ready to talk about a project? Apply for a construction loan.
