There are several types of typical construction loans, but there are also a few lesser known loan-types that may be of interest to builders, brokers and investors: Model loans, land loans and fix-flip loans. The details of these loan types vary. Knowing the difference and how to make these non-traditional loan types work for you is key to the success of your build.
Model loans are for builders needing a house to model to prospective buyers. If you see a new development, especially those which are pre-selling lots before the homes are built, there is likely a model home. The purpose is to give buyers a representation of what they will get when their home is completed. Because this isn’t a residential home, the model qualifies for a different type of loan. Should the home be sold for residence after the development is completed, that buyer would have a traditional mortgage. Model loans are structured differently than other construction loans, the rates vary and loan-to-value ratio is different than a traditional mortgage. At Builder Finance, you can view our terms here.
Land loans are exactly what they sound like: Financing to purchase a plot of land and to hold as land inventory and/or to make horizontal improvements. They differ from construction loans as there is no vertical construction being performed. Land is less marketable and has a more volatile value than a complete house, making it riskier for the lender. Because of the extra risk, many lenders have lower LTV levels and charge higher interest rates.
Land loans that fund horizontal improvements are also referred to as acquisition and development loans. Loan funds may be made available for upzoning, utility connectivity, adding roads and access, curbs and gutters, and performing other site work.
In the modern housing market, it is common for real estate investors to purchase existing homes and to then, “fix” or remodel them, and re-sell the home for a profit. This is called fix-and-flip. Fix-and-flip loans offer investors a good way to purchase properties of varying conditions that do not make sense to demolish.
Non-traditional loan types are an effective way to get the funding and financing you need for your next project. A model loan for a home that buyers can view prior to purchasing in your development is huge, most people need something tangible they can see before making a decision in the home buying process. Land loans for developing a neighborhood can help get the process started. Fix-Flip loans for remodeling and re-selling a home can be much easier on the pocket than a traditional mortgage. Learning the ins and outs of how to make them work for you will certainly make projects easier going forward!