If you regularly build new construction homes on a Spec or Pre-Sale basis, it’s likely that you’ve worked with different lenders. While there are many kinds of loans available for new construction, lines of credit for spec construction are uniquely well suited for the needs of spec home projects.
Why Consider a Spec Line of Credit for Your Spec Construction Loan
A line of credit may also be referred to as a revolver or revolving line of credit. A line of credit is designed to be a relatively long term lending arrangement that enables a builder’s goal to make a profit by completing and selling properties. With a line of credit, after money is repaid it can be borrowed again. Such a structure is typical for financing multiple spec construction projects – at the same time and/or in a sequence with later projects not breaking ground until earlier projects repay.
With a standard construction loan, usually classified as a term loan, money is drawn down as work is completed. Eventually the property is sold and the loan is repaid. That is the end of the loan. Such a structure is typical for a single project, so it may also be referred to as a project loan.
If you have a spec line of credit rather than an individual construction loan, it may save you interest and fees, provide you with more loan proceeds, and, while it is more work up-front than other funding options, over time it should save you time and effort. A spec line of credit can be a major contributor to a successful spec construction project.
Benefits of a Spec Line of Credit
Whether a standard construction loan or a spec line of credit are better for a particular borrower or project depends on the borrower’s goals and the specific terms of each loan.
Based on our offerings at Builder Finance Inc., advantages of a line of credit can include:
- High loan amounts: The line of credit may provide more loan proceeds per project - up to 100% loan-to-cost (LTC).
- Low fees: If it is reasonably utilized, the line of credit should have lower fees. At the time this article is written, total fees over the entire 5 year term are limited to 2% of the line of credit size.
- Attractive rate: An attractive interest rate that may be fixed for 5 years or a fixed spread to an interest rate benchmark such as the Prime Rate.
- Greater forward certainty: A line of credit is a commitment to lend at certain terms subject to certain conditions for five years.
- Other: There are other benefits such as the ability to “skip” interest payments; a fast and easy draw process; and a fast, online process for adding new projects.
The Truth About Paperwork
Some builders are concerned about the application process and paperwork associated with a spec line of credit.
It’s true – the paperwork is substantially frontloaded. In order to make a five-year commitment, the lender needs to do more due diligence than it otherwise would. After upfront approval however, the terms are set and so ongoing paperwork is minimal.
Lenders want to understand your past and future and may ask for documentation. For the most smooth process, have your tax and bank statements, lists of assets and liabilities, and profit and loss statements ready.
Organization Makes a Difference
If your business is pretty well organized and you are working with an accountant who prepares annual financials, the paperwork reality should be manageable - potentially well less than a day’s work.
If your business activities are not so organized, the paperwork in reality could be more. In this situation, be upfront and ask for the lender’s help. The lender is the expert and would be happy to assist.
How to Tell If a Line of Credit Is Right for You
If you qualify for a line of credit, it probably makes sense to get one. Other than fees associated with the commitment and effort involved with applying, it is essentially a cheaper option.
If you have closed a line of credit, it is essentially your choice how much you want to make use of the line of credit. For example, if you lock in a fixed rate with your line of credit and interest rates increase, your line of credit may become significantly more appealing than other lending options. Alternatively, if the housing market slows down, you can choose to simply use it less.
How to Get Started
We recommend that the first thing to do is speak with a lending representative to determine if you would qualify for this kind of funding, or whether another kind of loan would be better.
If you think that a line of credit for spec construction would be right for you, email team@builderfinance.com and ask to get started. A Builder Finance representative will talk with you to determine whether a spec line of credit is the right match for your project and help establish the size of the line of credit for which you would qualify.
