Understanding Colorado Construction Loans
During the past few years, construction loans have become more mainstream within the private lending industry for single-family homes, townhomes, and small multifamily properties in both urban and suburban areas. The exit strategy may involve selling the property upon completion or renting it out and refinancing with a long-term loan. No private lender will issue a construction loan to someone intending to occupy the home as their primary residence or a second home. Private and hard money lending are strictly intended for investment purposes.
Construction loans in Colorado represent a form of short-term financing designed for building a new home, business, or other real estate projects. A construction loan can assist you in building your dream home or expanding your business operations. It is especially useful if you also need to purchase the land. Construction loans cover expenses related to building the property, including construction equipment, materials, permits, and labor. You will need to qualify for this loan just as you would for any other type of financing.
However, they differ from conventional mortgage loans because the property being financed does not yet exist. Since there is no completed property to serve as collateral, lenders view these loans as higher risk. As a result, the qualification requirements are stricter than those for a traditional loan to account for the increased level of risk to the lender. Construction loans are complex, and the most straightforward way to make the most of them is to rely on our professional guidance at LBC Mortgage. Along with searching the market for the right fit for you, we will also take care of all your loan paperwork.
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How Construction Loans Work
Applying for the Loan
At this stage, the lender will assess your credentials as a borrower and review your construction contract. Evaluating your credentials includes reviewing your income, living expenses, employment stability, and credit score. To assess your construction contract, lenders typically consider the property’s projected increase in value after construction. In the case of an investment property, they may also take into account the expected rental yield. Lenders generally require builders to provide documentation such as construction license details, council approval for the construction plan, insurance, and a construction schedule.
Phased Payments
Once your application is approved, your lender will release phased payments based on completion milestones. Below is a list of general completion milestones most lenders follow:
Site Prep: Depending on your land parcel, this may involve demolition, site levelling, clearing old debris, soil testing, and other measures to prepare the site for construction.
Foundation: At this stage, your builder will proceed with measurements for construction plans and designs. Other steps include laying the house foundation, installing under-site drainage, and adding mesh protection against termites.
Frame Set Up: This involves installing the property’s internal and external support structure along with conduits for plumbing and electrical connections.
Lock Up: As the name suggests, this stage allows for ‘lock up’ fittings such as doors and windows. At this point, all plumbing and electrical work can begin.
Completion: This is nearly the final stage and includes painting and a final inspection, along with the installation of any additional fixtures and appliances.
Payments typically range from 5 to 20% at each stage and are released based on invoices provided by the builder.
Repayments
Once construction nears completion, your loan functions as a standard loan and requires regular repayments. An important point to note is that your repayments may begin at the lock-up stage. Additionally, during the construction phase, you may be required to make ‘interest-only’ payments, while after construction is completed, your repayments will include both interest and principal components.
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Construction Loan Requirements
Traditional Colorado lenders will need to evaluate your financial situation, including your credit score, Debt-to-Income (DTI) ratio, and how much you can contribute toward a down payment. Additionally, you’ll complete a detailed application process, which includes providing the following information:
• Total funding required
• Information about the builder
• A projected timeline
• Floor plans
• A breakdown of labor and material costs
Traditional requirements for this loan also include the following qualifications:
• The loan must be used for the construction of a new property
• Large down payments, typically 20–25% of the total project cost
• A good to excellent credit score
• A DTI below 40%
This is where a borrower can take advantage of the benefits of a private money lender, which include:
• Lower credit scores allowed
• Higher DTI accepted
• Closing in days rather than months
• Loans based on After-Repair Value (ARV) and the future value of the asset
Private money lenders focus on the equity and asset value of the property you want to build. If your situation makes sense, they can provide the funding quickly and efficiently. Sometimes the borrower needs the home to be built quickly so they can sell their current home and move their family into the new one. Alternatively, they may have already sold their previous home and are staying somewhere temporarily. Approval and closing over several months with a traditional lender just isn’t feasible in this situation. The extra time required for inspections and other regulations would only continue the delays.
A hard money loan’s quick turnaround time is a better solution in this case. With the assistance of our specialists at LBC Mortgage, you’ll have more control over the process and won’t need to rely on strict timelines and budgets that must be frequently re-evaluated by a traditional lender.
Secure a Construction Loan with LBC Mortgage
If you are not confident in your ability to qualify and are under time pressure, reach out to LBC Mortgage. Our team of real estate professionals will review your specific situation. We specialize in complex or unusual cases that still make financial sense but don’t qualify for traditional financing. Getting a construction loan when you have a more complicated financial situation may present challenges to traditional institutions due to various requirements, but these types of transactions are typical deals for our team.
We aim to build a long-term partnership with investors, so that future projects can be financed more easily. Our specialists have a strong understanding of the Colorado real estate market and can offer solutions tailored to your financial situation and preferences. We anticipate potential issues in advance and prevent them by always thinking several steps ahead. Contact us today for a free consultation.