Building Your Dream Home Starts Here With Tennessee Construction Loans
Whether you’re dreaming of a custom home on a mountaintop or in the bustling city center, thinking about financing such a big project can feel daunting. This is where Tennessee construction loans can make the process a whole lot easier. Imagine a loan that’s built specifically for the purpose of construction or extensive renovations – it’s a perfect fit.
In this guide, we’ll be breaking down everything you need to know about Tennessee construction loans to give you the confidence to begin this exciting new journey with ease. So, grab your hard hat and let’s get started!
What Are Construction Loans?
Construction loans are a type of short-term financing that’s designed for ground-up construction projects or major renovations. In contrast to traditional mortgages that finance existing homes, construction loans focus on the building process. Construction loans are a great option for those looking to build their dream home or want to make big changes to their existing home, such as creating a new addition or gutting large sections of the interior.
These loans are considered to be non-QM loans (non-qualified mortgages) since they don’t follow the lending standards set by the Consumer Financial Protection Bureau (CFPB). This simply means that the qualification criteria for construction loans are much more flexible than what’s required for conventional loans.
How Does a Construction Loan Work in Tennessee?
A construction loan works a bit differently compared to loans used to finance existing homes. Instead of getting the funds in a lump sum, funding for construction is released in installments as the project progresses. This is done to make sure that the funds are used for its intended purpose and reduces risk for the lender.
Additionally, construction loans are short-term loans that are meant to finance the project during a relatively short time frame. After this time frame is over, you’ll most likely need to refinance to a mortgage with a longer term if you plan to keep the property.
Who Would Benefit From a Tennessee Construction Loan?
Anyone who plans to build their dream home or renovate an existing property could benefit greatly from a Tennessee construction loan. This includes, but is not limited to:
- New or experienced real estate investors
- Property builders or developers
- Anyone looking to build a custom home from the ground up
- Land owners looking to build a property
- Home flippers
Where Can You Get a Tennessee Construction Loan?
Construction loans are available through private mortgage lenders and select banks and credit unions. Despite being offered by some banks or credit unions, private mortgage lenders who specialize in construction loans, like Defy, have the expertise to ensure the closing process runs smoothly.
Tennessee Construction Loan Requirements
Construction loan requirements can vary considerably between lenders, so it’s important to do your research to understand what you may need to qualify. To give you an idea, here are our construction loan requirements at Defy:
- Minimum FICO score of 620+
- Maximum loan-to-cost (LTC) of 85%
- Maximum loan-to-as completed value (ARV) of 70%
- Maximum loan amount of $10 million
- Fixed interest rates
- No tax returns required
- Can close in as little as two weeks
- Available for ground-up construction, fix-and-flip, or fix-and-hold
- Available for 1-4 unit properties, including investment properties
Construction Loans Compared To Other Similar Loan Types
Construction Loans vs. Conventional Loans
Construction loans and conventional loans differ in their structures and purposes. Construction loans act as a temporary financing solution that’s specifically designed for building a new home or for substantial renovations that increase a property’s value. On the other hand, conventional loans are a long-term financing solution used to buy existing homes. Conventional loans typically require traditional income documentation as part of the approval process, whereas construction loans require historical experience and/or construction plans instead.
Construction Loans vs. Fix-and-Flip Loans
Although both construction loans and fix-and-flip loans are short-term loan options that fit under the non-QM loan category, they’re designed for distinct goals. Construction loans are for larger-scale construction projects, like building a home from the ground up or extensive renovations. With fix-and-flip loans, the goal is to purchase a property, renovate it quickly, and then resell it for a profit.
Tennessee Construction Loan Alternatives
While construction loans can be a great financing option, they may not be for everyone. Here are some alternative non-QM loan options to consider:
- Fix-and-Flip Loans: Get financing for property flipping projects.
- Fix-and-Hold Loans: Get financing to renovate a property that you plan on keeping for a bit longer.
- Bank Statement Loans: Use your bank statements to qualify.
- Profit & Loss (P&L) Loans: Use your business’ P&L statements to qualify.
If you’re unsure which loan option may be right for you, contact us at Defy and we can guide you through it! We offer all of these loan options and more.
Pros and Cons of Getting a Tennessee Construction Loan
Pros:
- Opportunity to build your dream home from scratch
- Property value has the potential to be higher than expected
- No tax returns or other traditional income documents required
- Interest-only payments required during construction
- Faster approval process
Cons:
- Short-term financing, meaning you’ll have to refinance to a longer-term loan if you plan to keep the property
- Can have slightly higher interest rate compared to conventional loans
- Potential risk of project delays due to contractor issues, weather, or any other unforeseen problems
Tennessee Construction Loan FAQs:
- What is a construction loan?
A construction loan is a short-term loan that covers the costs of building a home from the ground-up or major renovations on an existing one.
- How do construction loans work?
Instead of getting the funds upfront in a lump sum, the funds are disbursed in stages for a construction loan. These stages are usually tied to project milestones like completing the foundation or framing. This method ensures that the funds are being used as planned.
- Can you get a construction loan for renovations?
Yes! You can get a construction loan for major renovations, as long as the project increases the property’s value.
- Do construction loans include the cost of land?
Yes, construction loans can include the cost of land. Beyond the land, it can cover the costs of materials, labor, and permits.
- Where can I get a construction loan?
While you can get a construction loan from some banks and credit unions that offer them, finding a private mortgage lender that specializes in construction financing could make the process much smoother. These lenders, like Defy, are experienced when it comes to construction loans and they’ll be able to provide guidance throughout the entire process.
- What’s the difference between construction loans and conventional loans?
Construction loans and conventional loans have completely different structures. Construction loans are non-QM loans (non-qualified mortgages) meant to finance ground-up construction or extensive renovations. Whereas, conventional loans are QM loans (qualified mortgages) used to finance existing properties.
- What’s the difference between construction loans and fix-and-flip loans?
While fix-and-flip loans are technically a type of construction loan and they’re both short-term non-QM loans, there’s a slight difference between the two. Construction loans are used to finance the construction of new homes or major renovations and the funds are released in installments as construction progresses. Meanwhile, fix-and-flip loans are used to buy, fix up, and sell a property in a short time frame for a profit.
- What credit score do I need to qualify for a Tennessee construction loan?
The exact credit score you need to qualify for a Tennessee construction loan varies by lender. At Defy, we require a minimum credit score of 620+ for our construction loans.
- How big of a down payment do I need for a Tennessee construction loan?
The minimum down payment you need for a Tennessee construction loan will depend on both your lender and your credit score. You can expect to put down anywhere between 15-20% of the expected costs.
- What are the requirements for a Tennessee construction loan?
Every lender sets their own requirements for a Tennessee construction loan, so exact requirements may vary. Below, we’ve outlined what you would need for a construction loan with Defy:
- Minimum FICO score of 620+
- Maximum loan-to-cost (LTC) of 85%
- Maximum loan-to-as completed value (ARV) of 70%
- Maximum loan amount of $10 million
- Fixed interest rates
- No tax returns required
- Can close in as little as two weeks
- Available for ground-up construction, fix-and-flip, or fix-and-hold
- Available for 1-4 unit properties, including investment properties
- Do I need tax returns to get a construction loan?
No, tax returns aren’t required to get a construction loan. Lenders typically focus on historical experience, construction plans, or a combination of both to see if you qualify.
- What are the best construction loans in Tennessee?
There’s not necessarily one single “best” construction loan in Tennessee. The best construction loan option will depend on your needs, qualifications, and the scope of your project. It’s important to compare rates, terms, and down payment requirements from different lenders before choosing a construction loan. If you’re looking for guidance on what type of construction loan may work best for you, contact us at Defy for a consultation. We offer ground-up construction, fix-and-flip, and fix-and-hold loans to help you find the perfect fit.
