A construction loan is a short term loan used to pay for the cost of building a home.
A construction loan refers to a loan process in which the proceeds are used for financing a construction project of some type. However, when it comes to protocol in the U.S., the term may also be used in several additionally related instances regarding construction, namely, interest reserves and the like, which simply refers to repayment set for a specific time that the project is completed.
Construction financing can be given when all of these features of the loan are set in place, i.e., the proper guidelines, monitoring, and the promise that the project will in fact come to fruition.
The main concern of course that comes from setting up any loan from a lender has to do with repayment, so the construction loan contract will mainly be focused on ways to make sure that repayment does occur.
Construction loans can often become extended to those developers that are looking to sell directly after building, and in these specific cases, an appraisal may be ordered to predict the overall value of what the project will most likely be.
The fundamental guideline includes affordability, but is not used when an owner wants to sell the property right away. Yet it may be used in cases whereby the builder is creating condominiums, and whether or not apartments should be built instead to create more income for the developer.
As far as managing a construction loan is concerned, just about all lenders will mitigate their risks in a myriad of ways. One way might be to supervise the general contracting, become involved in environmental inspections, appraisals, location, etc., and in this way lenders are far more likely to provide the largest loans.
Before considering a construction home loan, let’s first discuss how a construction loan works.
Once qualified and approved for a construction loan, a bank or lending organization begins paying money to the person borrowing money in a scheduled manner, called a draw.
A draw is a method of payment taken out of a construction budget to pay for materials, contractors, and suppliers for building the new home. The number of draws is determined by the builder, bank, and buyer.
Once all draws have been taken and the home has been completed, the borrower has to pay the remaining balance on the loan plus interest.
A home construction loan comes with more risks than other loans. Below are tops reasons why a construction loan is risky.
Construction loans for a home can be hard to get. Below are requirements lenders need for a home construction loan.
Typically, a construction loan will need to be paid back by an automatic monthly payment plan (draw) until the project is completed, and in some cases a draw can be taken away from the budget in order to put it into additional contractors and suppliers.
For more information on construction home loans, call Meridian Mortgage at 317-968-9500 or contact us online.
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