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A Guide to Your Construction Financing Options in 2023

Most construction projects will cost hundreds of thousands of dollars at the very least. There are also lots of construction projects that will set people back millions of dollars.

For this reason, many people aren’t able to foot the bills for the projects they work on with cash. They’ll need to look into utilizing the right construction financing options to get their jobs done.

So, what are some of the loan options that exist for those taking on construction projects? You need to know which financing options exist. It’ll enable you to apply for the right types of construction loans when you need them.

Check out our guide to construction financing options in 2023 below and decide which of these options you think would work best for you.

Construction-to-Permanent Loan

If you’re able to obtain a construction-to-permanent loan, it’ll prove to be one of the best construction financing options available to you. It’ll be very easy for you to understand how this type of construction loan works from beginning to end.

When you first start a construction project, you’ll borrow a certain amount of money to finish the job. Once the project wraps up, you’ll then be able to take the money you owe and convert it into a 15-year or 30-year mortgage so that you can pay it off over time.

It’ll almost feel like you’re taking out a mortgage from the beginning. But the big difference will obviously be that you’ll be building the home or business you want and then paying it off later on a little at a time.

Construction-Only Loan

A construction-only loan will feel a whole lot like a construction-to-permanent loan when you first take it out. You’ll get all the money you’ll need to complete your construction project.

But once this project is over, you won’t be able to roll the money you owe over into a mortgage. Instead, you’ll need to either pay your loan off on the spot or take a short period of time to pay it off completely.

More often than not lenders will only give you about a year to repay a construction-only loan. It’s why this type of construction loan isn’t more popular than it is.

Low Doc Construction Loan

A low doc construction loan is also structured in a similar way to a construction-to-permanent loan. There are, however, some additional differences that make it unique from both a construction-to-permanent loan and a construction-only loan.

For starters, a low doc construction loan will only give you access to about 80% of the cost of your construction project. It’ll also put you in a position where you’ll have to send regular updates to a lender at the end of every stage of your construction project for you to obtain additional construction financing.

A loan like this may require a little more work on your part. But it should also help keep your construction project on the right track.

Renovation Loan

If you’re only going to be renovating a particular portion of a building as opposed to creating a brand-new building, you may not want to take out a traditional construction loan. A better option will be to take out a renovation loan.

Renovation loans are often available for much smaller amounts than construction loans. But they can be very effective for those who would like to carry out a renovation project without having to rely on credit cards or high-interest personal loans.

Owner-Builder Construction Loan

Owner-builder construction loans are different from all the other types of construction loans that appear on this list. This is because of the way they’re structured and who is most often involved in taking them out.

These loans are almost identical to construction-to-permanent loans and construction-only loans at first. But the dramatic difference is that the borrowers of these loans will also play the part of the builder of the buildings that the loans are being used for. There won’t be a separate company hired to handle the construction project involved.

Some lenders have stopped giving out these types of loans because of the risks associated with lending money to those who might not be qualified to head up construction projects. But others continue to allow them as long as borrowers can prove they have backgrounds in construction.

End Loan

An end loan is actually a term that’s used to describe the mortgage that a person takes on after a construction loan becomes a permanent loan. But an end loan can also refer to a process that plays out a little differently than the construction-to-permanent loan process does.

During that process, a construction loan will transform into a permanent loan automatically without there having to be a second closing. But some lenders don’t like to do things this way and will call for borrowers to go through a second closing.

This is typically when the term end loan comes into play. This end loan can cost more when it comes to construction financing than a regular construction-to-permanent loan would.

Which Construction Financing Option Do You Like Most?

Most people and even businesses don’t have millions of dollars stashed away in the bank that they can use for construction projects. They have to find construction financing to help pay for them.

Do you need to obtain a construction loan? You should weigh all your financing options and pick the one that looks the best to you. It should enable you to get the money you need without spending a small fortune in the process.

Do you want to get more tips on taking out loans? Look for them in our other blog articles.

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