Advantages and Disadvantages Of Construction Loans

Bobby Montagne
Apr 21, 2017 · 3 min read

If you are looking to secure funds to kick start your new real estate project in Virginia, then construction loans are a very good option. As the name suggests, a construction loan is offered to real estate entrepreneurs who are looking to develop their plot or rehab their fix and flip into a saleable property.

Hard money construction loan financing is frequently used to finance residential or commercial new construction projects. Typical construction loan financing runs for six months to two years, requires interest-only payments — that are often bundled into the loan itself — and are funded in installments that follow a predetermined schedule of milestones.

Advantages of Construction Loans

Some of the advantages of construction loans include:

Pay Interest Only: Most lenders will only require you to pay the interest on the withdrawn amount. They will not ask you to pay for the capital during the construction of the project. This can be extremely useful for you. You can wait until the construction is over and then only need to repay the loan amount. Until then, you only need to pay interest

Easy Approvals: It is far easier to get approved for a construction loan from a private lender than to receive a loan from a regular bank. As such, many real estate developers prefer to take a construction loan than to approach a big financial institution.

Flexible Terms: Construction loans from a hard money lender can be tailored quickly and effectively to your project’s specifications. Whereas a bank has loan terms and guidelines that are often set in stone, a hard money lender is a smaller shop and can work with you to make sure that draw schedules and interest payments are set in a way that works best for the both parties.

Disadvantages of Construction Loans

Some of the disadvantages of a construction loan include -

Higher Rates: Construction loans from a hard money lender will be at a higher rate than those of a bank. This is for several reasons: borrower profile, the existing condition of the property, riskier investment and the availability of short-term funding. As long as you intend to be in and out of the project within a year, construction loans from hard money lenders tend to be a good option.

Short Term Loans: Construction loans are short-term loans, typically given for a period of 6 months to 2 years. If your project will take more than 2 years to complete, the amount that you will be paying on interest will likely eat into your profits.

A construction loan is mostly useful when building a new property or undertaking a serious rehab on a real estate investment property. If you are confused about how to go get a construction loan, then the best thing you can do is to contact a reputable lender in Virginia. Construction loans can be a bit confusing to understand at first. So, talking to several lenders directly is a good way to become more familiar with this loan structure. They will listen to your needs, take a look at the big picture — the property, the area, the exit sale number — and will structure a good construction loan for your specific project needs.

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