Getting construction financing for an investment property can be challenging compared to financing a primary residence. Investment property loans usually require a down payment of at least 20%, good credit score, and a lower loan-to-value ratio. There are several options for construction loan lenders that specialize in financing investment properties. Choosing the right lender requires evaluating interest rates, fees, loan terms and lender reputation. This article provides an overview of construction loan options and tips for selecting lenders when financing real estate investments.
Types of construction loans for real estate investors
Construction loans are usually short-term loans used to finance building or renovating investment properties. After the project is completed, the loan must be refinanced into a longer-term permanent mortgage. Common types of construction financing for real estate investors include:
– Commercial banks – Banks provide construction loans for investors at competitive rates. However, they tend to be more conservative, requiring high down payments and excellent credit.
– Mortgage bankers and brokers – Specialize in arranging financing for investment properties. Brokers work with multiple lenders to find the best rates.
– Hard money lenders – Provide high loan-to-value ratio financing at higher interest rates for riskier projects banks may not finance. Hard money loans are faster to close but more expensive.
– Private lenders and crowdfunding – Individual investors provide construction financing through private lending networks or real estate crowdfunding platforms. Interest rates are often between banks and hard money lenders.
How to choose the right construction loan lender
When selecting a construction loan lender, real estate investors should compare:
– Interest rates and fees – Hard money lenders charge the highest rates while banks offer lower rates. Compare origination fees, application fees, and rate lock terms.
– Loan terms – Review the loan-to-value ratio, length of the construction phase, required down payment percentage, etc. Hard money offers higher LTVs.
– Qualifications – Each lender has specific requirements for borrower credit score, income, experience, etc. Hard money is more flexible than banks.
– Reputation and reviews – Check online reviews and the Better Business Bureau for complaints. Experienced lenders are less risky.
– Specialization – Find lenders familiar with investment property lending. Local and regional banks may better understand local markets.
– Speed – Hard money lenders can fund loans faster than banks. Compare timelines for processing applications and funding loans.
Getting approved for an investment property construction loan
Investment property construction loans have stricter approval guidelines than owner-occupied financing. Tips for getting approved include:
– Put at least 20-25% down – Lenders require more equity upfront to mitigate their risk on investment deals. Save up a larger down payment.
– Have excellent credit – Most lenders require a minimum credit score around 700. Pay down debts and correct errors on your credit report.
– Use a lower LTV – Opt for a loan amount 75% or less of the as-completed property value. Lower LTVs have higher approval odds.
– Have cash reserves – Lenders want to see 12-24 months of mortgage payments available in your bank account to cover costs if units don’t rent quickly.
– Have related experience – First-time investors may not qualify. Lenders look for a track record of investment property ownership.
Getting construction loan financing for real estate investment properties requires more equity, stronger credit profiles, and more qualifications than primary residence loans. Comparing lenders on interest rates, fees, approvals, experience and other factors is key to choosing the right construction loan for your investment property. Putting more down, enhancing your credit, and using a lower LTV can improve the chances of getting approved.