Construction
Loan
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It is a temporary, short-term, interim loan provided by a lending institution specifically to construct or renovate a building. The lender makes payments to the builder at periodic intervals as the work progresses.
It is generally followed by the long term financing called a
take out loan, issued upon completion of improvements.
It is called Construction loan with take-out. Construction loans normally work together with take-out loans.
If you are planning for the construction of your
house & you need to get financed, go for construction
loan.
Construction can be financed in two
ways:
- One way is to use two loans, a construction loan for the period of construction, followed by a permanent loan from another lender, which pays off the construction loan. Two loans mean that you shop twice and incur two sets of closing
costs.
- The second way is to use a single combination loan, where the construction loan becomes permanent at the end of the construction period. One loan means that you shop only once but you must shop construction loans and permanent loans at the same time. The single loan approach results in only one set of closing costs.
Documents Needed:
In addition to standard credit documentation, there a few
more documents that borrowers will need to have when they begin the application process for a construction
loan:
- Final plans and specifications to obtain an appraisal.
- Purchase contract for the lot or Settlement Statement if you've already purchased
it.
- Property profile i.e. description of materials.
- Line Item Cost Breakdown from the builder.
- You require minimum credit score of 620.
- Builder's construction contract.
- You need to obtain the necessary building department
permits.
- You need to have sufficient liquid assets.
- Copy of Builder's license.
- Builder's statement or application.
- Often it is required that construction be completed within 12 months.
Term of Loan:
The terms of construction loans
vary. It is usually run for 6 months to a year.
Interest Rate: It
carries an adjustable interest rate that resets monthly or quarterly.
Interest on construction loans is deductible as soon as construction begins, for a period up to 24 months, provided that at the end of the period you occupy the house as your residence.
Generally interest is charged only on the amount of funds used. Payments are interest only during the construction period, converting to principal and interest payments upon completion of the home.
When shopping for construction loans, you must
take account of all of these costs, not just the
interest rate.
Repayment: In the case of units being constructed for sale, the repayment will be from the purchase of the units by the future owners and that is why the concept of a supported absorption rate is useful. Absorption rate is an estimate provided usually by the appraiser in the process of determining a value “as completed” for the project.
In the case of a building being constructed for rental operations, the project would include a “lease-up” period, which would allow for time to reach what is called “stabilization”. The repayment would be the permanent financing in the form of a commercial real estate term-loan.
Types Of Construction Loan:
So go ahead & choose from the above options.
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