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The following article was published in our article directory on November 14, 2020.
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Construction Loan Explained

Article Category: Real Estate

Author Name: David Farrell

Also called self-build loan, construction finance is a short-term type of loan typically used for financing the building of a house or other real estate projects. The home buyer or builder obtains the loan to cover the project cost before getting long-term funding.
A construction loan often carries a higher interest rate than a regular mortgage loan. This is because construction projects are deemed relatively risky.

How Construction Loans Work
The short-term loan is typically requested by a homeowner or builder with a term of only 12 to 24 months. After completion of the home construction, the borrower has the option to either convert the existing construction loan into a long-term mortgage or get a new loan to repay the construction loan (end loan).
Only the interest payments on the construction financing may be required while the project is ongoing. Some construction loans require full payment of the balance upon completion of the project.
When a borrower takes out a construction loan for homebuilding, the lender may directly pay the funds to the contractor, instead of the borrower. Installments are made, depending on the project completion stages. A construction loan may be obtained to finance restoration and rehabilitation projects, and to build new houses.
Construction loans allow borrowers to build their dream homes. However, because of the inherent risks, they carry higher interest rates and require bigger down payments compared to traditional mortgages.

Construction Loan vs. Owner-Builder Construction Loan
A borrower who plans on being their own general contractor or build the home using their personal resources will likely get denied for a construction loan. Such a borrower may instead qualify for owner-builder construction loans, which are not easy to qualify for.
Therefore, if you are a potential borrower, you need to present a well-made construction plan that showcases your home-building abilities and knowledge convincingly. You must likewise include a contingency fund to cover unforeseen surprises.

Construction Loan Special Considerations
Most construction loan providers require a minimum of 20% as down payment, with some requiring as high as 25%. As a borrower, you may encounter difficulties obtaining a construction loan, especially if you have inadequate credit history or rating.
There may be insufficient collateral since the home hasn�t been completed yet. It may not be acceptable to the lender. To get approved for a construction loan, you must provide the prospective lender with a �blue book� or a comprehensive listing of all construction details. You also need to prove that a qualified and competent builder is working with you on the project.
A construction loan is often extended by regional banks or local credit unions. A local bank tends to have a good grasp of the local housing market. The bank is also more amenable to extending home construction financing to local borrowers.
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Keywords: Development finance, construction finance, bridging loans, 100% development loan

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