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Construction Loans: The Process Explained

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Construction Loan Down Payment?


Construction loans are commonplace for anyone heading a construction project, whether you’re intending to build your dream home for your family or you’re planning on a developing a commercial lot. There are many factors that go into applying, receiving and paying for construction loans and because construction loans are complex and different significantly from an ordinary loan, many people choose to hire construction loan brokers to handle the work for them.


construction loans_02Construction loans include the interest, inspection fees, title work and miscellaneous costs during home construction. The advantages of a builder carrying this loan far outweigh the minimal costs to a home buyer, as a builder assumes the risk and insurance on the house; reports directly to the bank with a higher level of accountability having already established a relationship; and expertly expedite all draws and fee issues.


Construction To Permanent Loan Rates


These loans utilize fund control or construction reserve accounts, which are responsible for disbursing the predetermined funds from the lender to the borrower once the corresponding construction tasks are completed. The line item budget specifies the construction tasks to be completed and the amount of funds that will be disbursed upon completion. Construction loans also contain a Contingency line item within the line item budget, which is 5-10% of the total budget of the construction costs to account for any unforeseen expenses or over budget items.


These types of loans are short-term loans of up to one year that allow you the time and funds to build a home.  Bankrate notes that they typically offer a variable interest rate and allow you to make interest-only payments while the home is being built. Funds are dispersed by the lender for each stage of construction. In one loan variation, known as construction-to-permanent, the balance of the construction loan rolls over to a traditional home mortgage when construction is complete, contractors are paid, and the home is certified for occupancy.


What Are The Requirements For A Construction Loan?


Hard money construction loans are the faster and easier alternative for obtaining financing for the construction of a residential or commercial property. Traditional lenders such as banks can take 45-60 days to fund a construction loan, while a hard money construction lender can fund within a quicker timeframe.


construction loansFor purchase and construction loans, the VA funding fee varies, depending on size of down payment, whether the borrower served or serves in the regular military or in the Reserves or National Guard, and whether it’s the veteran’s first VA loan or a subsequent loan. The funding fee can be as low as 1.25% or as high as 3.3%.



Construction Loan Broker


Most good owner builder construction loans are one-time-close, construction to permanent loans. Once you are finished building, there are no more closings to convert to your permanent mortgage. At this point most lenders simply send you a final loan agreement with the final loan amount and interest rate and terms for your signature. There should be no need to go back to the closing agent again for a second round of document signing if the owner builder loan is set up properly.


Our home construction loans are made for a limited duration, typically no more than a year.  We offer interest only financing for the term of the loan.  During construction, we work with your contractor to fund the project through pre-determined draw payments, which are designed to ensure that distinct portions of the project are completed before any additional funds are released for later phases. The advance rate and loan amount will be determined based on the project cost and equity required.  In certain cases, the cash equity required may be reduced by equity in the land.  Speak to one of our knowledgeable lenders for more details.  Please give us a call today toll-free at (844) 824-2432 to learn more!

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