Construction loan is a short-term interim loan, for financing the cost of construction. The Lender advances funds to the builder in periodic intervals as the work progresses. They are Loans made for the construction of homes or commercial buildings. Usually funds are disbursed to the contractor-builder during construction and after periodic inspections. Disbursements are based on an agreement between borrower and lender.
Also they are termed as story loans. That means that the lender has to know the story behind the planned construction before theyre willing to loan you money. Because its a story loan, its not going to be standardized like mortgage loans underwritten to guidelines. That said, there are some common features to a construction loan.
Construction loans typically require interest-only payments during construction and become due upon completion. Completion for homeowners means that the house has its certificate of occupancy.
These loans are usually variable-rate loans priced at a spread to the prime rate or some other short-term interest rate. You, the contractor and the lender establish a draw schedule based on stages of construction, and interest is charged on the amount of money disbursed to date. Another variable in construction loans is how much of the project cost the lender is willing to lend. If you already own the land, then that can be considered as equity on the construction loan.
Many homeowners use construction-to-permanent financing programs where the construction loan is converted to a mortgage loan after the certificate of occupancy is issued. The advantage is that you only have to have one application and one closing.
Depending on your view on interest rate trends, you could also purchase a rate lock agreement valid through the expected completion of the construction. Just make sure you allow for the inevitable construction delays.
Also it must be noted that the construction loans, differ from the traditional home loans.
- Basic types
- Miscellaneous charges