Spec homes often attract a lot of homebuyers who want new homes without the six-month wait for a custom home. If you’re a builder, you might want to start building these houses. The benefit of building spec homes is that you can keep busy and make good money. The downside is acquiring financing for them. One of the best options for financing spec homes is obtaining construction loans for builders. If you’ve never used one before, you might want to learn more about them.
Here is a guide to help you learn all the vital things about construction loans that you need to know if you want to use them to build spec homes.
The Basics of Spec Homes
If you only build custom homes at this point, you might wonder a few things about spec homes. For example, what are they, and why do contractors build them? Do they offer benefits?
A spec home is basically a house you build and hope to sell by the time you complete it. You don’t have a buyer when you start the project, which means that you pick the home design, layout, and materials. Someone might offer to buy it at any point during the construction of the house. If not, you can list it when you finish the project and find a buyer then. A lot of contractors build spec homes to stay busy. It keeps the employees working when they don’t have custom homes to build. You can also make good money on these houses. Customers like them, as they offer new construction without the wait.
If you decide to build one, you’ll need a way to finance the project. As a result, you might turn to spec construction loans for builders. These loans offer the ideal way to finance a spec home project.
The Basics of Construction Loans for Builders
When it comes to builder spec homes, you’ll need a way to finance your project. One of the best options is through construction spec loans. A construction spec home has several features you should know about before getting one. Here are some of the most important features to understand:
They Are Bridge Loans
The first thing to know is that a construction loan is a bridge loan. A bridge loan is a loan that is not permanent. It’s temporary, or short-term. In other words, you can’t keep this loan forever. Your loan might last one year or maybe a little longer. When you finish the house, though, you must convert the loan to a different loan type. Hopefully, you will have a buyer by the time you finish the house. The buyer can then get the loan instead of you converting it to another loan.
You Take Draws
When you use a construction loan, you don’t have access to all the money from the start. Instead, you take draws from the total amount available, and you take them as you need them. You might need some money to start the project, but you might not need more money until a month or two later. The goal is to borrow it slowly as you need to pay for materials and labor.
The Lender Charges Interest
Throughout the loan, you won’t make regular payments. Instead, you’ll make interest-only payments. The lender only charges interest on the money you borrow through your draws, so you’ll pay less in interest charges at first.
They Base the Amount on an Initial Appraisal
Finally, your lender will approve your loan amount based on the appraisal of the home. They complete an appraisal based on your blueprints and the current market. The amount they approve for the loan is the amount you can borrow. You don’t have to borrow it all, though. As you see, these builders’ loans are ideal for spec houses. The downside is that you might face a few challenges with getting one.
The Challenges of Getting a Construction Loan
The challenges you face with getting a construction loan will depend on your situation. To understand these challenges, you’ll need to learn what lenders look for when approving construction loans. One of the builders’ loan requirements that lenders look for is credit risk. The lender will assess how likely you are to repay the money or default on your loan. A lender will assess your risk level before issuing the loan, and they’ll base their decision highly on this factor. One area that affects your risk level is your financial state. If you have money in the bank and a record of paying your bills on time, your risk level will be lower. Another area that affects this is your job experience. How long has your company been in business? If you’re a new company, it might be harder to get a loan than if you have an established business with a proven record.
The Benefits of Using Construction Loans for Spec Homes
Construction loans are ideal for contractors who want to build spec homes. One of the top benefits is that they’re affordable. While the interest rate might be slightly higher on a construction loan than other loan types, you’ll only pay interest on the money you borrow. If you space out your draws really well, you can minimize the interest charges you incur.
The second benefit is that you can build your credit history by using one. If a lender approves one for you, it provides the chance to build a positive history with the lender. If you can do this, the lender might willingly offer you construction loans in the future when you decide to build more spec homes in your community.
How to Learn More
If you’re interested in construction loans for builders, you can contact us at Shepherd’s Finance LLC. We specialize in these loans and other types and would be glad to answer your questions.
Call us today or visit our website to learn more!