Types of Construction Loans

Construction loans are used to finance both residential and commercial construction projects. These loans help homeowners who wish to build a new house and provide funds for developers looking to build offices, stores and other structures. These loans are typically interest-only during the construction process, with the full balance of the loan due when construction is complete. There are a number of different types of construction loans available to suit the needs of various borrowers.

One-Time Close

A one-time close loan is one of the simplest ways to finance the construction of a new home. These loans combine the construction costs as well as the long-term financing of the house. Once a loan agreement is signed, the lender will release funds to the builder in scheduled installments. The borrower may pay interest on these funds during construction, or he may be required to begin making mortgage payments. Once construction is complete, the borrower pays a traditional mortgage payment until the loan is satisfied.

Two-Time Close

A two-time close involves two separate loans, with one to cover construction and the other to cover the long-term financing. When the first loan agreement is signed, the lender releases construction funds to the builder. The borrower will pay interest only during the construction period. Once the house is complete, the borrower must sign a permanent mortgage agreement, either with the original lender or with another bank. This type of loan often results in lower mortgage rates and greater flexibility.

Modification Loans

A modification loan is a combination of a one-time close and a two-time close and allows for flexibility when construction costs run higher than expected. Once an agreement is signed, funds are dispersed based on the construction budget. The borrower pays interest on these funds until the job is complete. If more money is needed, the lender releases additional funds at the original construction loan interest rate. In the initial agreement, a second long-term mortgage rate is assigned, which is generally lower than the rate on the construction loan. The borrower is locked into one lender for both loans, however, just as with a one-time close loan.

Commercial Loans

Commercial loans are used for building commercial buildings such as stores or shopping centers. They are provided by banks as well as specialized commercial lenders. Due to the size of these loans, a loan analyst will generally assist the borrower with developing and reviewing the project budget. Typically, funds are dispersed as needed, which saves the borrower from paying interest on funds that are not needed. When construction is complete, these loans may be rolled into a long-term financing vehicle or maintained with the original lender until the business begins to generate revenue to pay back the loan.

Bridge Loans

Bridge loans are used to finance commercial projects when long-term financing is not available or is taking longer than expected. For developers waiting on traditional business loans, a bridge loan can help speed up the building process. This means that the developer can get the project completed more quickly and start generating income. Bridge loans typically have terms of less than five years, with many designed to only last a few months. The bridge loan may then be rolled into a regular business loan along with other start-up costs.

References

• Types of Construction Loans
• New Home Loans
• Bankrate.com