How Construction Loans Work

If you've ever heard of story loans then you've heard of construction loans also. Construction loans are loans in which a lender loans the money but has to know the story behind the planned construction. They must know this before they are willing to loan you the money and without this information, you basically get no loan. Keep in mind that since it is a story loan it will not be standardized like mortgage loans, which are underwritten by Freddie Mac or Fannie Mae guidelines. With that said, there are still some common features within a construction loan.

During construction there is an interest only payment, which becomes due upon completion. This means for homeowners that the house has a certificate of occupancy. Construction loans are also variable rate loans, which are priced at a spread to the prime rate. The contractor and the developer develop a schedule which is based on the stages of the construction. The interest is charged on the amount of money disbursed on the date. In construction loans it also depends on how much of the cost for the project the lender is willing to spend. Let's say that you already own the land - well, this is considered as equity towards the construction loan.

A lot of homeowners use the construction loan as a permanent financing program. This can convert a mortgage loan to a construction loan after the certificate is issued. A major advantage for this is that you will only have to close with one application. With a construction loan it is not meant to be long term such as a mortgage. You might be willing to pay a higher interest rate for the mortgage loan if you are doing a construction permanent financing. In most cases, constructions loans are provided in four installments. The installments are proved after the builder submits the proof and necessary documents that satisfy the lending institution's requirements.

Some residential construction loans include the following; a construction only loan or separate construction mortgage loan. This loan can be obtained; by the borrower, for six months to a year. A disadvantage for this loan is the builder has to pay twice for closing costs. Other commercial loans are a construction for mortgage loans, and commercial construction loan, depending on your situation can determine what loan best suits you.