Imagine making an empty lot into a busy apartment building. It’s a great idea, but how are you going to pay for it? That’s where “new construction apartment loans” come in handy. A recent study says that the number of multifamily construction starts will rise by 8% in 2024. This indicates that people are seeking new homes. This growth highlights the importance of innovative companies securing the necessary funding to complete their projects (National Association of Home Builders). New construction apartment loans are a type of borrowing that can be used to build a multifamily building from scratch.
Many people struggle to understand the process and the various loan types available, ranging from short-term loans for building to long-term permanent loans. It will be easier for you to get started in mixed real estate after reading this blog. It will explain what these loans are and how they work.
We can help you navigate this exciting market, leveraging our over 30 years of underwriting experience and extensive network of investors and loans. Find out how we can help you make your dream come true.
What Exactly Are New Construction Apartment Loans?
A new construction apartment loan is a short-term, specialized loan for financing the creation of a new real estate project, not buying an existing one. It’s a critical financial tool for developers looking to turn raw land into a multifamily property.
How They Differ from Traditional Mortgages
With a regular mortgage, you get a lump sum at closing to buy a house that is already built. A construction loan, on the other hand, works like a line of credit. The act of giving out money in stages is called “draws.” This type of financing is ideal for building a rental property because you only receive the funds needed for each completed project phase. This method is critical because it helps keep costs down and lowers the lender’s risk by making sure the money is used correctly and the project stays on track.
Because these loans only last for a short time (12 to 24 months), they are not meant to be forever. Once the project is finished, a longer-term loan will be given to replace them.
The Two Main Types of New Construction Loans
Navigating the world of construction loans can be complex, but they generally fall into two categories:
Construction-to-Permanent Loans (Single-Close)
This choice is easy to use because it only requires one loan and one closing. Once the building is finished, the loan changes from a construction loan to a long-term debt on its own. The best thing about this type of funding is that you can lock in a fixed rate right away. This protects you from possible interest rate increases and keeps you from having to fill out a second application and pay more closing costs. This choice makes it easy to move from the building phase to a regular long-term loan, which usually has a set rate and a term of 30 years.
Stand-Alone Construction Loans (Two-Close)
In this method, there are two different loans. The first loan covers the initial stages of building construction. The second loan is a long-term loan that will be used to pay off the first one. One important thing to think about with this type of loan is that it gives you some freedom. Let’s say that interest rates go down while the building is being built. If that happens, you can get a better interest rate on your long-term loan. However, there is a chance that the rates will increase, and you will have to pay two sets of closing costs. This makes it a more complicated and more expensive loan choice.
A Closer Look at the New Construction Loan Process
The process for getting a new construction loan is careful and step-by-step. It needs to be carefully planned and carried out. There are a lot more steps than when you apply for a regular mortgage, but knowing what they are can help you feel a lot more in control.
Step-by-Step Breakdown
- Preparation is Key: You need a specific and thorough plan before you even talk to a lender. This includes finished design plans, a reasonable budget, and a contractor who has been checked out and is qualified. At this critical stage, our financial advising services can help you put together and make a strong case to potential lenders.
- The Application: Obtaining a construction loan requires more effort than securing a regular mortgage. Lenders look at more than just your personal financial past, like your credit score. They also assess the project’s viability and potential. There will be a close look at your budget, schedule, and the knowledge of the contractor you choose.
- Underwriting and Approval: This is where our 30 years of experience as underwriters really shine through. Our team looks at the whole project, such as the loan amount, the expected loan-to-value (LTV), and how much demand there is in the market for the planned multifamily property. A thorough underwriting process ensures the project is sound and increases the chances of approval.
- The Draw Period: After being cleared, the money is sent out in stages, or “draws,” as construction goals are met. The lender will usually send an inspector to make sure that the work was done according to the plan and budget before each draw is made. The borrower and the investor are both safe because this process keeps the project on track.
- Completion and Conversion: You will get a proof of occupancy when the construction is finished. This means that the construction is ready for renters. The short-term construction loan is now either paid off or turned into a permanent, long-term loan. This means that you can start paying back the loan over a longer period.
Financing Options for Your New Apartment Project
Stand-alone and construction-to-permanent loans are the most popular types of loans. Still, many others can be used for different projects and types of borrowers.
Bridge Loans & Hard Money Loans
These are quick and easy short-term fixes that are often used to buy land or “bridge the gap” before getting standard financing. Bridge loans are ideal for companies that need to act quickly on a business opportunity or whose project doesn’t meet the standard lending requirements. We are a reliable hard money lender for real estate, and we can help you get the money you need quickly and efficiently when traditional loans aren’t a choice. There is a higher interest rate and a lower loan-to-value (LTV) on these loans compared to conventional loans. They are paid back quickly.
Conventional Loans
Conventional loans, which are given out by banks and other financial institutions, are the most popular type of long-term financing. They are often a great way to get long-term support. Even so, you usually need good credit and a big down payment to get one. The secondary mortgage market is significant because of companies like Fannie Mae and Freddie Mac. They help lenders access cash and make these loans more accessible.
Government-Backed Loans
- HUD FHA Loans: The Department of Housing and Urban Development (HUD) backs these loans through the Federal Housing Administration (FHA). They can be used to build or fix up multifamily homes, such as affordable housing. They do give long-term loans with fixed rates, but the application process is more involved and takes more time.
- SBA Loans & USDA B&I Loans: The primary objective of these programs is to assist small businesses that own commercial property. SBA loans can be used to buy land and build a home that the borrower will live in. In the same way, the USDA Business & Industry (B&I) program helps companies in rural areas by providing loans for a variety of reasons, such as buying commercial property.
DSCR Loans
Debt Service Coverage Ratio (DSCR) loans are an excellent choice for people who want to invest in real estate. The loan is accepted based on the property’s potential to generate income to pay off the debt, rather than the borrower’s income. Since the property’s cash flow is the main requirement, this makes it a great way to finance multifamily properties and fix and rent or fix and hold plans. Investors who are self-employed or have complicated finances that might not meet the standards for a traditional loan, such as this type of loan, are most likely to be rejected.
Why Partner with a Multifamily Lender Like Us?
Picking the right financial partner is just as important as choosing the right home. A good lender gives you more than just money; they also offer advice, a strong network, and a range of financing choices to help you succeed. When it comes to the harsh world of multifamily real estate, working with us can give you a significant edge.
We have been underwriting for 30 years, so we know how to put together the best deal for your project. We understand the complexities of new construction projects. We can assist you throughout the entire process, from initial planning stages to the final conversion. Because we’ve done this before, we can see your project’s full potential and come up with a financing plan that works for you.
You’ll get reasonable rates and terms because we have a vast network of over 200 investors and private loans. Because we can reach so many people, we aren’t limited to just a few goods. Instead, we can find and compare several loan options to find the best one for you, whether you’re building a multi-unit construction or looking to buy a house to rent out.
We don’t just lend money; we also give personalized financial advice. We’ll be your financial advisors, helping you figure out the best ways to reach your goals, whether that means construction from scratch, doing a complete makeover, or a “fix and flip.” We offer a wide range of products, such as bridge loans, DSCR loans, and hard money loans, so we can meet all of your needs and give you the tools you need to make your dream business a reality.
Your Next Step to Building a Multifamily Property
We’ve talked about what new construction apartment loans are, the different kinds, and the whole process. You should now have a good idea of the financing choices you have. You’re not going through this journey by yourself, thanks to our knowledge and extensive network.
Are you ready to take the next step in building your apartment complex? We can help you get the money you need for your job.
Conclusion
We’ve talked about what new construction apartment loans are, the different kinds, and the whole process. Now you have a good idea of why these loans are such a valuable way to get rich in the apartment real estate business. If you have the right finances, you can turn an empty lot into a profitable property.
You don’t have to go through this process by yourself. With 30 years of underwriting experience and a network of over 200 investors and loans, we can help you feel confident as you move forward. You can get a conventional loan, a bridge loan, or a DSCR loan from us. We’ll help you find the right loan for your job.
Are you ready to take the next step in building your apartment complex? Get in touch with us right away to set up a free meeting to talk about your project. Together, we can make your real estate dreams come true.
FAQs
What credit score do I need for a new construction loan?
While requirements vary by lender, a strong credit score is a key factor in securing favorable terms. Most lenders look for a score of 680 or higher. A higher score can often lead to a lower interest rate and a larger loan amount.
How much can I borrow?
The loan amount depends on several factors, including your financial profile, the appraised value of the completed project, and the lender’s loan-to-value (LTV) ratio. Lenders typically finance a percentage of the total project cost, with you providing the rest as a down payment.
Can I get a new construction loan for a single-family home?
Yes, it is possible to get a new construction loan for a single-family home. However, our expertise lies in multifamily properties, ranging from 1-4 units to much larger apartment buildings, which is a different specialization.
Are interest rates on these loans fixed or variable?
The interest rate type depends on the specific loan options you choose. A construction-to-permanent loan allows you to lock in a fixed rate from the start, which will apply to both the construction and the long-term phases. Stand-alone construction loans, on the other hand, often have variable rates during the building period.
How do I secure a long-term loan after construction?
If you have a single-close loan, the conversion to a permanent mortgage is automatic once construction is complete. With a stand-alone construction loan, you will need to secure a separate permanent mortgage to pay off the initial construction loan. This is often done while the project is nearing completion to ensure a smooth transition.
