Updated almost 9 years ago on . Most recent reply
Can someone help me understand the construction loan process
When applying for a construction loan you get the loan in pieces as the home is being built. The home is complete and then you roll it over to a mortgage? What is the benefits of this? When you use the brrr method buy rehab refinance repeat, why do you refinance and what are those benefits?
My second question is when you go to buy a home to demolish it and build new, first do you need to buy the home with a mortgage and then get a construction loan to demo it and rebuild? Or can you buy the home from the beginning with a construction loan and use that loan to buy the home, demo it, and build new?
Most Popular Reply
@Dennis Kelly let me try and answer your questions
When you get a construction loan you do not get the loan in pieces. The loan is provided but the payments are dispersed based on a draw schedule as part of the loan based on work which is completed. Typically you get a construction to permanent loan so you are not paying a double closing - so when construction is done it rolls into abnormal mortgage.
When you do the BRRR you are in a situation where hopefully you have more than 20% equity in the property so you can refinance to get your money you put down to get the property and renovation you get it all back.
When you go to buy a house me to demolish it, you can get a mortgage then go to demolish it but you should get bank approval or they can call the loan - the loan could not be worth more than the land value. If you are buying to knock down you can get a construction to permanent loan but you will need a hefty down payment as typically the bank will lend 70% of just the land value. My recommendation would be to buy it upfront with a construction loan
- Chris Seveney
