Securing financing for construction projects can be complex and challenging for both seasoned developers and first-time builders. Traditional banks often have rigorous criteria, and their processes can be cumbersome. That’s where Malve Capital can make all the difference, providing flexible solutions tailored to your unique needs. This guide is to help you understand construction loan terms and offer tips on how to secure the best ones for your project.
About Construction Loans
Generally, there are three types of construction loans – acquisition and development loans, construction-only loans, and construction-to-permanent loans:
Acquisition and Development Loans
These loans are best suited for those looking to buy land and then prepare it for construction. The funds generally cover the purchase of the property and its subsequent improvements, such as connecting utilities or installing roads. Once the development is complete and the lots are sold, the loan is usually paid off.
A construction-only loan, as the name suggests, is solely for construction costs. It’s short-term, usually lasting about a year, and once the construction is finished, the borrower must repay the loan in full. Borrowers often refinance with a longer-term mortgage or secure another form of financing to clear this loan.
This is a combination of the above two types. Initially, it covers the construction cost, and once the project is complete, it transitions into a regular mortgage. The advantage here is that you only need to sign one set of documents and essentially have two loans in one.
You can depend on our funding experts to help you choose a loan that suits your needs at the most favorable terms.
Key Terms To Know
Unlike other financings, construction loans have several unique terms, such as:
- Draw schedule – the stages at which the lender will release funds as the construction progresses.
- Interest reserve – a portion of the loan set aside to cover the interest during the construction phase.
- Loan-to-cost (LTC) ratio – the loan amount expressed as a percentage of the total project cost.
- Loan-to-value (LTV) ratio – the loan amount expressed as a percentage of the project’s appraised value upon completion.
- Contingency reserve – funds set aside for unexpected costs during construction.
Let Malve Capital guide you through the process of securing the construction financing you need to start and complete your project.
How to Negotiate Better Terms
When you’re planning a construction project, ensuring you have the most favorable construction loan terms is crucial. Here are some tactics to consider:
- Know Your Credit Score – Lenders use your credit rating as an indicator of risk. A strong credit score can pave the way for better interest rates and terms.
- Maintain a Healthy Debt-to-Income Ratio – Doing this will assure lenders that you have the ability to repay the loan.
- Shop Around – Don’t accept the first offer. By getting quotes from multiple lenders, including alternative lenders like Malve Capital, you can leverage the best deal.
- Consider a Larger Down Payment – Making a larger downpayment can significantly reduce your interest rates, as it reduces the lender’s risk.
- Have a Detailed Plan – Presenting a well-thought-out construction plan, complete with budgeting and timelines, will give lenders confidence and may lead to more favorable terms.
Ultimately, working with a private lender like Malve Capital will position you to obtain the most favorable construction loan terms.
Understanding the types of construction loans available and the essential terms associated with them can help you obtain favorable financing. It’s not just about securing a loan but about ensuring that the loan terms align with your project needs and financial capability. At Malve Capital, we provide a level of flexibility and understanding that traditional lenders might not offer. Your dream construction project deserves the best loan terms. Contact us today to discuss your options!