How do construction loans work?
Typically, a construction loan is an interim loan while the dwelling is being constructed. The funds are usually disbursed throughout the construction period and replaced with permanent financing (mortgage) once the construction is completed. We will gladly e-mail you more information in an easy to read question and answer format that will help you clear any questons that you have, contact us.
In general, just like every other loan. You sign loan documents and money is funded into escrow. In the case of a construction loan, only a portion of the total loan is released. The balance is released either in preset “stages” or as workers complete portions of the project according to a budget. The former is called a “draw” system and the latter is called a “voucher” system. Q: How are the payments calculated and who makes them?” A: Commercial loans have the added security of an income producing property providing the funds to pay the loan payments. For residential loans, it’s the borrower’s income. When a property is being built, there is no secondary source of repayment so the burden of payment would normally fall to the borrower. But lenders didn’t want borrowers to use up all of their funds in case something went wrong with the project, so they created “interest reserves.” This is a chunk of money set aside in the loan to do nothing but make the loan payments during the construc
Construction loans are more then a game of numbers. The lender wants to know the story behind the planned construction before they’re willing to loan you the money. Because it’s a special loan with a story, it’s not going to be standardized like mortgage loans underwritten to Freddie Mac or Fannie Mae guidelines. However, there are some common features to construction loans. Construction loans typically require interest-only payments during the construction period and become due upon the completion of construction. Completion for homeowners means that the house has passed all of the necessary inspections and has its certificate of occupancy. Construction loans are usually variable-rate loans priced at a spread to the prime rate or some other short-term interest rate. You, together with the builder/contractor and the lender, establish a draw schedule based on the stages of construction, and interest is charged on the amount of money disbursed to date. Another variable in any constructio
Construction loans are story loans, which means the lender must know the story behind the intended construction before they are willing to loan a borrower the money. Because it is a story loan, it will not be structured like typical mortgage loans underwritten to Freddie Mac or Fannie Mae guidelines. That being said, there are some common features to a construction loan. Construction loans usually require interest-only payments during the construction period and become due upon completion of property. Completion for homeowners means that the house has its certificate of occupancy or CO which is issued by the contractor/builder. Construction loans are mostly variable-rate loans priced at a spread to the prime rate or another short-term interest rate. The borrower, the contractor/builder and the lender establish a draw schedule based on phases of construction, and interest is charged only on the amount of money disbursed on each phase to date. Another important variable in construction l
