Whether you’re planning to build a dream home by the shore, a new business, or a vacation property, LBI offers plenty of opportunities. Securing financing is one of the first steps to making your vision a reality. For construction projects on LBI, that means applying for a construction loan. Construction loans are different from traditional mortgage loans. Understanding how they work, especially in the context of LBI’s unique real estate market, is key to making your project successful.
What is a Construction Loan?
Unlike a traditional mortgage, which is long-term financing for an existing property, construction loans are typically short-term (often 6 to 12 months) and aim to provide the funding while the property is being built. Instead of disbursing the entire amount at once, the lender provides funds in stages as the construction project progresses. These stages are referred to as “draws,” and each draw represents a portion of the project that has been completed. Once the construction is complete, the loan is either paid off in full or it can be converted into a traditional mortgage.
Here’s how the process typically works:
1. Loan Approval: Before you can access the funds for your project, the lender will evaluate your plans, budget, and overall financial situation. They’ll typically require detailed documentation, including blueprints, permits, construction timelines, compliance with coastal regulations, and a cost estimate from your contractor. The lender will also assess your creditworthiness and the value of the land or property you’ll be building on.
2. Disbursement of Funds: Once approved, the loan funds are disbursed in installments throughout the construction process. For example, you might receive a portion of the loan to pay for the foundation, another portion after framing is completed, and so on. At each stage, the lender will likely require an inspection to verify that work has been completed.
3. Interest-Only Payments: During the construction phase, most construction loans require interest-only payments on the amount disbursed rather than paying down the principal. This can make your monthly payments more manageable while the project is underway. Once the construction is finished, the loan converts to a standard mortgage, and you begin making payments on the entire loan amount, including both principal and interest.
4. Completion and Conversion: After the construction is completed, the loan either converts to a traditional mortgage or is paid off in full, depending on your agreement with the lender. Some lenders offer a construction-to-permanent loan, which automatically converts into a long-term mortgage once the building is completed.
Learn more about your future home
Types of LBI Construction Loans
There are a few different types of construction loans available to those looking to build on Long Beach Island, each with its own features and benefits. The main types include:
1. Construction-to-Permanent Loans
This type of loan allows you to finance both the construction and the permanent mortgage in one loan. You’ll only need to apply once, which streamlines the process and can save time and money. This can be ideal for homeowners looking to simplify the process and avoid multiple applications.
2. Stand-Alone Construction Loans
A stand-alone construction loan is a short-term loan used exclusively for the construction phase. Once the building is complete, you must apply for a separate mortgage to pay off the construction loan. This option may be more suitable if you don’t want to commit to a permanent mortgage until the construction is finished and the property is ready for occupancy. However, it involves additional paperwork and closing costs.
3. Renovation Loans
If you’re planning to renovate or expand an existing property on LBI, a renovation loan can be a great option. This type of loan allows you to finance both the cost of the renovation and the existing mortgage, with the loan amount based on the projected value of the property once renovations are complete. Renovation loans are ideal for property owners looking to improve or modernize an existing structure.
The key to success with an LBI construction loan is working with a trusted lender who understands both the local real estate market and the specific requirements for coastal construction. By doing your homework and gathering the necessary documents and approvals ahead of time, you can streamline the process and focus on what matters most: building your dream property on your favorite island, LBI!
