Rental Property Investor · Long Beach, NY · Member since 2014 · 36 posts · 7 votes
When applying for a construction loan you get the loan in pieces as the home is being built. The home is complete and then you roll it over to a mortgage? What is the benefits of this? When you use the brrr method buy rehab refinance repeat, why do you refinance and what are those benefits?
My second question is when you go to buy a home to demolish it and build new, first do you need to buy the home with a mortgage and then get a construction loan to demo it and rebuild? Or can you buy the home from the beginning with a construction loan and use that loan to buy the home, demo it, and build new?
A construction loan always works that way because the company loaning the money wants to make sure you use it for the construction and you don't walk away with the money. In their eyes, they are loaning you the money on the future value of the property and not the current value so it helps to mediate their risk by doing a payment schedule.
Once the construction is compete, you re-fi into a conventional mortgage because the rates are much lower. There are strict rules when doing a conventional type (FHA, VA, etc.) loan and a tear down house or a new build do not qualify. Conventional loans are secured by the property of which the loan is given and therefore it has to pass an inspection so if you walk away from the house, the lender can take the property and sell it quickly to recoup their money.
I would talk with a mortgage broker in your area to get a better handle of the finer details. It is his/her job as a broker to find the best loan for your needs. I would also get preapproved by your lender before you sign a contract on a property so you know all the details and you won't waste your time. Hope that helps!