You Can Buy That Fixer Too!
Use Construction Loans to Fiance Distressed Properties
We've all seen them, that property that just screams potential. Maybe it's the tear down with the ocean view or the leaning Craftsman that has personality. Regardless of the property which calls to you; it's for someone else....someone with cash. Not so fast, even average buyers can buy that "great deal" by using a construction loan for financing.
Construction loans are not just for building a home from the ground up. They can be used for a variety of purchases. Construction loans can help finance the purchase and rehab of a foreclosure or any other distressed property. By following some simple steps, you can buy and profit from that deal, just like the big boys.
Experienced Investment-Savvy Real Estate Agent
Not all agents know how to help you identify potential properties. The agent should understand the investment side of real estate and know how to provide comparable property values for an unfinished/distressed home.
Licensed Home Inspector/Geological Inspector
Before moving too far into the process, you have to have a solid home inspection. Inspectors are knowledgeable about how to evaluate the property's systems: air conditioning/heating, plumbing, electrical, foundation, possible mold and much more. The geological inspector might be involved to determine if any damage is related to the shifting ground. While you intend to rehab the property, the first step is determining what you're up against.
Experienced Construction Loan Lender
Construction loans are different from typical home financing. the process includes steps not found in traditional closing and having an experienced lender who specializes in construction loans can make the difference between a successful outcome and a disaster.
General Contractor and Architect (if necessary)
Unlike traditional home loans, construction loans include involvement by your building team. Your contractor needs to be a licensed and insured and the lender will approve the work prior to lending on the project. By finding your building team up front, you can ensure you have a solid plan in place before approaching the lender for the loan.
Using The Construction Loan - How Does It Work?
A construction loan is comprised of two parts: the financing for the actual construction/rehab work and the permanent loan which will take effect once the project is completed. the loan amount is disbursed at regular intervals during the construction process. As each milestone is reached, teh lender will inspect and disburse funds. This is called a draw. The schedule is agreed to in advance based on input by the buyer, the lender and the contractor.
Can I Afford And Qualify For A Construction Loan?
Lending guidelines have tightened since the housing market collapse. Lenders are more careful about how they qualify borrowers and the risk associated with the loans. A construction loan is a riskier loan as the lender does not have a completed structure as collateral. Yet buyers with good credit and a down payment will find that qualifying is easier than they think.
While most lenders require a 20-25% down payment, there are loan programs available with only 10% down. The lender will also require cash reserves that are higher typically than a traditional home loan. The reserves provide a cushion for unforeseen issues or a longer than expected gap in disbursements from the loan.
What Properties Qualify For A Construction Loan?
Properly packaged, virtually any property can qualify for a construction loan. Unlike other rehab loans, there is no minimum or maximum amount of money that you can borrow, depending on your qualifications. Construction loans can be used to finance/refurbish:
- Tear down properties
- General fixer-upper properties
- Partially built homes
- Homes abandoned during a remodel
- Dated homes -total or partial remodel
A construction loan can be used for most any property which does not qualify for traditional financing. The lender is not looking to approve the home itself, but will carefully look at the contractor, the building plans, local ordinances, CC & Rs and the line item cost breakdown. Builders often use a "blue book" to detail the project for lender review. An appraiser is also employed to assess the future value of the property.
Investors and cash buyers have been able to capitalize on the distressed property market. Paying with cash or private funds is not the only way to buy and refurbish a distressed or foreclosed property. If you spot that perfect tear-down on the lake, give it a second look, then find the experienced team to help you navigate the process of getting a construction loan and make the dream a reality.
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