Difference between a Construction Loan and a Renovation Loan

Many people are confused about the difference between a construction loan and a renovation loan, as are some loan officers at many lending institutions.

In simple terms…

A construction loan is used when someone wants to build from the foundation on up to a new structure. You can start from an empty lot or an old structure that will be completely torn down, old foundation dug up, and a new foundation poured, with a new structure built on top.

A renovation loan is used to add to or rebuild an existing structure on its original foundation. The renovation can be as simple as updating kitchens and baths or painting interiors and exteriors, or as complex as gutting out the entire structure and rebuilding with all new plumbing, electric, walls, floors, ceilings, and new appliances. Adding a new foundation to an existing one, in order to accommodate a large extension, falls under a renovation loan.

Different rates

The next question I usually get is: What are the rate differences? Generally speaking, they are the same for both construction loans and renovation loans.

The biggest difference is the loan-to-value calculation used in determining a number of loan dollars that you can borrow for a project. That calculation is different for two main transactions, purchase or refinance.

Purchase transactions will allow up to 90% of purchase price and the construction price. Purchase price percentage will vary when the loan amount goes above $850,000.

Refinance transactions will allow up to 80% of the After Improved Value. This is very important since, in most cases, the after improved value will allow almost no out of pocket cost (they can be rolled into the loan) to the borrower in order to obtain and close this loan.

the Cost Based-Line Item

One very important document that is used in both options is the “Cost Based-Line Item” Excel spreadsheet that I use for the project. It allows all parties to know exactly what the total cost of the project is, at stage-by-stage values.

This form will also be used once the draw process starts and you begin requesting monies for the line items that have been completed at that time. I work with you and the builder/contractor to make sure that all parties — you, me, and the contractors — are on the same page as to what gets paid for, and when. Doing this up front ensures a smooth build period later on with less stress for all concerned.

Of course, there are many details to be considered in all of these options, and that is where my expertise in both the construction and banking fields can help you in getting the right loan for the right job.

Call me today to discuss your project and needs — 914 736-2855.

3 Ways I Can Protect You Financially

Most people do not realize that when you get a construction or renovation loan from a bank you are getting more than just the monies to complete the project; you are getting a measure of protection for both yourself and the builder/contractor.

Protection 1 — Escrow

Many builder/contractors demand upfront monies from you before they even start your job, and once they initially start the work (typically demolition of part of your home) they demand even more money before they continue with the new build.

They argue they need to be sure they have the money to pay for materials and labor before they actually do any work. Meanwhile, you are afraid of paying up front, worried that they may work extremely slowly or even not at all which, unfortunately, does sometimes happen.

I do speak to you and the builder/contractor, which you choose to do the job, and explain how the bank loan offers a measure of protection to both parties.

I explain to all that the first step is getting the entire loan approved and closed before any work is started. That way, the builder/contractor knows that the entire sum of money for the project is sitting in a bank escrow account, waiting to be disbursed once the work is completed and inspected.

In this way, a builder/contractor will have no excuse for wanting upfront monies for the job — they know that a bank is holding and distributing it. If they continue to demand upfront monies, that is a red flag that your builder/contractor may be struggling or otherwise not be reputable.

Protection 2 — Advice

This is the second way that I help to protect you — In working with you and your builder/contractor, if I spot this or any other red flag I will let you know about it immediately. We can then discuss whether it may be in your best interest to find a new builder/contractor, one that can perform a stage or the work before being paid.

One exception to paying after work are for manufacturers deposits for building materials and other soft costs. At closing, 10% of building cost can be advanced to cover these types of fees. This is one of the details that I discuss with you at length during the loan process.

Protection 3 — Cost Based-Line Item

My Cost Based-Line Item Excel spreadsheet is central to ensuring a smooth building process. I design one for every project, detailing each stage of the construction or renovation project and their costs. With it, all parties are kept on the same page in regards to project stage and stage costs.

I also use this form during the draw process, when you start to request monies to pay for the line items that have been completed. Establishing the Cost Based-Line Item sheet and its use up front, eases the process before ground is broken and reduces stress for everyone.

The bottom line is that a properly originated construction or renovation loan can provide protection for both the owner of the property and the builder/contractor.

Call me today to discuss your project and needs — 914-736-2855.


707 Westchester Ave
Suite 104
White Plains, NY 10604


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