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Spec Construction Loans: How Do They Work?

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In a seller’s market, it’s difficult for people to find homes to buy.

If you’re a builder, you can take advantage of this by building some spec homes.

As a builder, you can construct custom homes for people who hire you, but you can also build spec homes. If you want to do this, you’ll need to find a lender that offers construction loans.

Construction loans are ideal for building spec homes. Are you ready to learn what these are and how they work? Continue reading this guide to learn some of the most essential things about construction loans.

The Definition of Construction Loans

Lenders and contractors often refer to construction loans as builders’ loans. A builder loan provides a way for a contractor to build a house they will sell.

The home doesn’t have a buyer when they begin the construction process. Instead, the builder chooses the home plans, land, and building materials for the house and begins the project.

The contractor will likely put up a “for sale” sign by the house to alert people that the home is for sale from the start. Anyone shopping for a home can view this house and purchase it at any stage.

In some cases, contractors sell these homes shortly after the construction process begins. In other cases, they might not sell them until they complete them.

The most vital thing to know is that you can’t keep a construction loan on the project when you complete it. A construction loan is a short-term, temporary loan you use to build the house.

The loan might last for six months to one year. You must convert the loan to a standard mortgage when the timeframe ends.

How They Work

So, how do these loans work? They begin with finding a lender that offers them. Next, you apply for a loan.

If the lender approves the loan, they’ll approve it for a specific amount. You don’t have to borrow the full amount, but you can’t borrow more than the approved amount.

Next, you take draws from the loan. Your lender might let you take as many draws as you’d like, or they might have a limit on the number you can take.

The lender charges interest on the loan throughout this time, but they only charge interest on the amount you’ve taken from the draws.

Therefore, you shouldn’t take any draws until you need the money, as this helps you save money on interest charges.

When you sell the home, you pay off the construction loan and owe the lender nothing. As mentioned, if you don’t sell the home by the time the construction loan ends, you must convert it to a regular mortgage loan.

How to Find Them

One challenge you might face when looking for construction loans is finding lenders that offer them. Unfortunately, lenders don’t always offer these products as they carry more risk than other loan types.

You can begin by looking into Shepherd’s Finance. We are a finance company that offers construction loans and other loan types.

You can also contact local banks, credit unions, and other financial institutions. As mentioned, these loans are not available everywhere, and you should know that lenders have strict guidelines for borrowers.

If you want to qualify for one, you’ll need to learn what lenders look for when processing applications for construction loans.

The Factors Lenders Consider Before Approving Them

If you’d like to get a construction loan to build a spec home, you’ll need to learn more about the factors lenders consider before approving these loans. Here are some of the things lenders look for when processing applications.

The Builder’s Experience

A lender always looks at a builder’s experience before approving a builder loan. Many lenders require at least three years of experience in the construction field as a requirement for a construction loan.

The Builder’s Finances

The lender will also ask to see your finances. They might ask for tax returns, bank statements, and pay stubs. The purpose is to ensure that you meet the necessary financial requirements for the loan.

The Equity in the Project

A lender also looks closely at the equity you have. If you already own the land, you begin with equity, which is favorable to lenders.

The Timeline

You should also submit a timeline for the project. The lender wants to see your plan for the project to see how much time it will take.

The Projected Profit

It’s also important to provide the lender with the total costs for the project and the potential appraised value of the home you’re building. This shows the project you can make on it.

The House, Land, and Covenants

The lender also might ask to see the blueprints and covenants in the area where you want to build. These are just standard requirements that lenders have.

Tips for Using a Construction Loan

If you want to make the most of your construction loan, you should aim for the best loan possible. You can also follow these tips.

Plan Everything Before You Begin

Planning everything before beginning the project is a great way to minimize the time spent on the project. In addition, when you reduce the time spent on it, you’ll save money on interest charges.

Complete the Project Quickly

The purpose of planning it is to complete it quickly. You’ll need to create a timeline and stick with it.

Market the Home

Another tip is to market the home for sale from the start. If you market it this way, you might sell it shortly after you begin the construction process.

Use Your Draws Wisely

Finally, you should use your draws wisely. If you plan them ahead of time, you can borrow less money, causing you to pay fewer interest charges.

Find Out if You Qualify

Are you interested in construction loans after learning these things? After all, building a spec home during a seller’s market might be a profitable event for your business.

You can learn more by contacting us at Shepherd’s Finance. We offer construction loans, fix and flip loans, and other loan types. You can fill out this form to learn more about our services.

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