4 Major Benefits of Construction Financing

When you plan to build your house instead of buying an existing one, you should know you won’t get a traditional mortgage loan. Alternatively, you would get a construction and renovation loan. Construction loans allow you to pay the costs when you are ready to build a new structure. These short-term financing loans can help you in each step of your construction journey, from putting the spade into the ground to completing the last building step.

What are Construction and Renovation Loans?

Construction loans are short-term and high-interest loans used to cover the cost of a building you intend to construct. They are far different from the traditional loans approved based on a house’s market value and the home’s condition compared to the recently sold. However, construction loans solemnly depend upon the house’s worth once the construction project ends.

Construction Financing

There are three types of construction loans one can choose from-

  • Construction-to-permanent loans- The mortgage broker pays you during construction and converts the cost into a mortgage at closing.
  • Construction-only loans are paid in full once the building project is completed. You should apply for a construction-only loan when you have a massive amount for the construction project.
  • Renovation construction loans- One only applies for this loan when they are buying a fixer-upper. Many government programs and schemes are available if you have planned to renovate your building, and such systems are incorporated into the mortgage.

Benefits of Construction Finance

1) Short-term option- The benefit of a construction loan is that it is short-term; it means you can pay the cash once your project is completed. Therefore, it gives you enough time to raise money and achieve your building. Sometimes, raising funds and paying for them is hard when you are in a construction business, and such loans can ease the process by providing adequate funding.

2) More convenient- The process has been eased with the introduction of construction-to-permanent loans. Here, one can ask for money for each step of the project until it is completed, and upon completion, one can ask for the necessary time to pay it back, thereby converting it into a mortgage. Such loans are advantageous for companies that do not have enough time to repay the amount they had taken as a short-term construction loan.

3) Easy determination of completion of construction- When you apply for the loan, you must provide your mortgage broker with the exact time frame of your building project and the related information so that they can scrutinize and come up with the right amount of funding. Being straightforward with your contractor will build trust, and you will easily approve loans for further projects.

4) Provides you with cash upfront- Construction finance can assist the subcontractors in purchasing specific materials for the construction since it makes it easy for them to get cash beforehand as they are involved in major building projects.