Construction Loans 101:

Both residential and commercial, real estate rentals continue to be in high demand. To

take advantage of this market, you might consider investing in a quality, income-

generating property that aligns with your goals. While purchasing an existing property is

an option, developing an investment property from the ground up offers significant

advantages. New-construction properties generally require less maintenance and repairs

compared to older buildings, which can contribute to higher profitability. Additionally,

modern features and contemporary design elements can make the property more

attractive to potential tenants, further enhancing its investment potential.

Construction loans, however, differ significantly from traditional financing options.

Understanding how these loans work and what they entail is essential. As you prepare to

apply, what key factors should you consider?

Understanding Construction Loans

A construction loan is short-term financing designed to cover the costs of building a

new property, including materials and labor. It differs from a renovation loan,

which funds updates to existing structures. Both types of loans last only until the

project is completed, after which they must be replaced with permanent financing.

Unlike traditional mortgages, construction loans have different terms, interest rates,

and qualification requirements. While both are secured by the land and

improvements, construction loans carry more risk for lenders since they finance

projects that aren’t yet built. This results in stricter requirements and higher

interest rates.

How Construction Loans Work

Construction loans cover building costs such as labor and materials, though they may or

may not include land costs. The required down payment varies, and equity in the land can

sometimes be used toward it.

Unlike traditional mortgages, construction loan funds are disbursed in stages, known as

draws, asthe project progresses. Each phase—such aslaying the foundation orframing—

must passinspection before the next draw isreleased. Afterthe final inspection and

issuance of a certificate of occupancy, the loan must be refinanced into a permanent

mortgage or the property sold.

Types of Construction Loans

There are two main types of construction loans:

Construction-Only Loan: Requires a separate application and closing for both the

construction loan and permanent financing,resulting in two sets of closing costs.

Construction-to-Permanent Loan: Involves a single application and closing,

automatically converting to a permanent mortgage once construction is complete,

reducing costs.

Each option has its pros and cons, depending on your financial needs.

Construction Loan Rates & Terms

Construction projects typically take 12–18 months, with loan terms ranging from 18–24

months. Extensions may be granted case by case. Since delays are common, consulting with

your builder and lenderis essential.

Interestrates depend on market conditions, creditscores, and project details. Currently,rates

range from 9.5% to 11.99% but fluctuate frequently.

Monthly payments are based on the funds disbursed, increasing as construction progresses.

While rates are higher than traditional loans, some options offer interest-only payments

during construction.

Construction Loan Closing Costs

Expect to pay 3%–5% of the loan amount in closing costs, covering fees for processing, title

insurance, legal services, and appraisals. Your lender can provide a detailed estimate.

Getting a Construction Loan

Before applying, hire a licensed and insured contractor or builder, as their credentials will

be reviewed during underwriting. You'll also need a detailed construction timeline and cost

estimate, which affect the loan amount and term.

Since the loan isn’t secured by a finished property, lenders closely evaluate your credit and

finances. A credit score of 680+ is typically required, and if applying through an entity, its

documents will also be reviewed.

Reach out to us today for more information and to get started

on a construction loan.

Corey Anderson

Office: 617-752-8000

Direct: 617-650-5362

Email: corey@capitaltrust.boston

Anthony Bettencourt

Office: 617-752-8000

Direct: 617-502-2113

Email: abett@bostontrustcorp.com

Julio Evangelista

Office: 617-752-8000

Direct: 407-914-5344

Email: jevangelista@capitaltrust.boston