Renovation and construction loans: borrowing against what is not there yet

A property that needs work before it is habitable does not qualify for ordinary financing, and this is where renovation and construction lending comes in. Renovation loans fold the purchase price and the cost of the work into a single mortgage, based on the value after improvement. The government-backed version has rules about eligible improvements and requires a consultant on larger scopes; conventional equivalents exist with their own limits. Both are slower than a standard purchase and both require the work to be specified, bid and approved before closing. Construction loans for ground-up work are short-term and interest-only, converting to permanent financing at completion — or requiring a separate refinance, which is a difference worth confirming at the term sheet. The mechanism that surprises first-time borrowers is the draw schedule. Money is released in stages, against inspections confirming the work is done, and the contractor is generally paid in arrears. That means the contractor has to be able to finance the work between draws, and a contractor who cannot is a project that stalls. The lender also underwrites the contractor: licence, insurance, financials, sometimes experience with similar projects. A borrower's preferred builder may not be approvable. Two line items that belong in every budget and are frequently missing: a contingency for what the walls hide, and the carrying cost — interest, taxes, insurance and utilities — for the months the property produces nothing. Timelines slip; the carrying cost does not. This article is general information, not legal, tax or financial advice. Rules change and every deal is different — check your own case with a licensed professional. Alberto Zaltzberg — Adonait · adonait.com