How to Finance Construction in a Tough Economy

Last week, Allied Van Lines released its 43rd annual Magnet States Report that ranked Colorado as the second-most attractive state for new residents in 2010. And according to a recent Coloradoan article, Fort Collins has been pegged by real estate search engine as one of the country’s top 10 housing markets to thrive in 2011.

As these accolades are added to the long list of our region’s top-10 and best-of recognitions, we can personally testify to the substance of the latest claims. As the nation’s construction industry continues to struggle, the two of us, as professional contractors, see a solid indicator that Northern Colorado is on the road to recovery: business is picking up for new construction and remodeling.

So where is the money coming from to fund major home improvement projects?

Some people are bringing cash to the table, but many are financing their larger remodels and additions. The two construction financing options we’re seeing the most are home equity loans and home improvement construction loans. Interest rates are still low, so now is a good time to consider these financing options.

Home equity loan: When your home appraises for more than you owe on your mortgage, then the difference is the amount of equity you have in your home. If you’re fortunate enough to be in this situation, consider opening a line of credit by borrowing against the equity. The fees and interest rates are typically lower than a construction loan.

When the economy was strong, roughly 95 percent of the construction financing we dealt with was in the form of home equity loans. After the mortgage and real estate industry crash, many people lost equity in their home, and banks grew leery about using equity as collateral against a line of credit. As a result, construction loans became more common.

Construction loan: These often are associated with new construction projects, but smaller construction loans can be secured for remodels and additions. A major benefit of a construction loan is that the bank closely monitors the project to ensure the builder doesn’t take advantage of the homeowner.

According to the website, construction lenders are getting stricter. They often require borrowers to have high credit scores in the 700s, show three consecutive years with their current employer and prove they aren’t saddled with massive credit card debt.

But don’t get discouraged. Getting a home improvement loan in today’s economy might be tougher than it used to be, but it’s not impossible. Consult a professional lender and residential real estate appraiser to better understand if financing a major remodel is right for you.

To view the article in the Coloradoan please click here.