How to exit a construction loan?

Question

CONSTRUCTION LOAN question: I am looking to build a modest, small home for myself. I have just started looking into costs and am seeing a ballpark of $200,000. If I sold my current home, I would pocket $140,000. I imagine I would need a construction loan for at least $100,000. My question is: Aren't construction loans good only for a year? After a year is up, don't you have to transition that into something else? I really want to avoid having a 15- or 30-year mortgage. Any suggestions?

Ed O. · Answer

I would avoid private or hard money lenders. It doesn't sound like you would need them in your situation. Call local / regional banks and tell them what you're after. Some banks want loans like this and will get you a good deal. Some don't want loans like this and as a result, will offer you terrible terms.

On our builds we -ALWAYS- get, at a minimum, 12 months interest only + 48 months amortizing for a total of a 5 year note / balloon. Our rate is set the day we start and does not float until completion. Banks will do this, not all of them will. Someone posted recently about the regrets of floating a rate on a build here - their rate went from the 3s to the 8s. If a bank won't keep the same rate for all 5 years, find one that will.

A lot of terms are negotiable and your situation is very unique. You could also consider using a heloc or unsecured line of credit for the assumed balance of 60k. Considerably less fees and red tape to get these and use them for this situation.

Matt Devincenzo · Answer

Let's ignore the transition, and term on the construction loan. You say two opposing items 1) you need to borrow $100k in addition to the $140k cash you'll have to build 2) you really don't want a 15-30 year mortgage...so how do you intend to pay off the $100k difference between construction costs and build costs?

Kristi Kandel · Answer

1. talk to private money lenders, hard money, and regional banks to get their current terms on your type of loan in your market - the people loaning the money outline their terms and you pick the strategy that fits your needs

2. Here is a helpful list of questions to ask banks/lenders: https://drive.google.com/drive/folders/13Z0B7mV--YRtVN3TJhez...

Caroline Gerardo · Answer

Simplification:

Construction to Permanent loan is a one and done deal. You need a licensed contractor and generally for owner occupied. Rolls into a long term 30 year mortgage when the job card is signed off (done).

or

Stand alone construction loan without any exit. Your plan is to sell at completion.

Both are available but not from everyone. Big variety of ins and outs/rules.

So this is  your owner occupied house? You have the cash to payoff the construction loan at completion? Location? Cost seems pretty low to actually stick build anything??? If you only have $140000 and the cost is $200000 are you selling current primary and living in a trailer or rental ? You own the land already? Cost of land, permits, plans, specs, utilities are in that $200000? If not I GUESS this leaves about $100000 to actually build the house that is a 580 square foot house in most markets and very simple

Brayden Hrycko · Answer

Hey @Brooke Morton,

What makes you want to keep your money tied up into a house? Let the lender finance the house and put your $ elsewhere to earn higher returns.

As far as the construction loans work there are one time close options which you can buy the land, finance the construction portion and then when complete they transition that into a typical mortgage.

I would strongly recommend looking into better options instead of having your money be dead equity in your home.

Happy to go over options with you as well.

Ryan Muska · Answer

Look up "One Time Close New Construction Loans."

Those are typically 30yrs and do not require an immediate refinance

Stuart Udis · Answer

There's no set term limit for a construction loan. The terms will be dependent on the financed opportunity but generally a loan for a one off single-family build will be 12-15 months.  Some are solely construction loans but there are also construction to permanent financing products available. You can generally obtain better permanent financing terms from non construction loan lenders but this should be balanced against how long you intend to hold the property. The transactional costs of originating a new loan (existing loan payoff, appraisal, title, new loan origination etc.) may cost more than the improved permanent financing terms if the hold period is relatively short.

Andrew W. · Answer

Yes the only way out is to either payoff the construction loan or a mortgage.  If you go the construction loan route, you can get a construction loan that converts to a mortgage (term loan) upon completion.  This will at least save you from having to pay again for a new loan when the construction is completed.  Basically when you apply for the construction loan you are also applying for the mortgage at the same time which saves fees, etc.  you still end up with a mortgage of course.  Also I would recommend using a regional bank if you can.   They are cheaper and the programs that I am aware of are better with a bank vs hard money.  Good luck

Brooke Morton · Answer

Well, I think the only way out of a construction loan is a mortgage or cash payoff. That's what I thought. I was just hopeful that there might be another option.

Scott E. · Answer

These construction loans can usually be extended 6-12 months (for a fee). But as Matt said, how are you going to pay off the $100k when you get to the end of the term?

How to exit a construction loan?

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