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Construction loans are generally disbursed in four installments which will be designated according to the construction agreement which is often referred to as a draw schedule. The construction loan agreement may indicate that the borrower can draw 25% of the loan when 25% of the work on the home is completed. Generally, an appraiser will be required to inspect the home to confirm that 25% of the home is completed and then the cycle repeats until the borrower draws the full 100% of the loan equal to four installments.
When it's time to draw on an installment, the builder supplies the borrower's lender with legal affidavits that show expenditures, all of the subcontractors involved in the work performed, as well as all of the material suppliers that have supplied material for the work performed on the borrower's home. Once the documents are confirmed, the bank issues checks to the subcontractors and material suppliers according to the data stated on the affidavits.
After the first draw of installment and throughout the period of the construction loan, interest-only payments are made by the borrower. He or she pays only interest on the loan as opposed to paying principal payments as well. Construction loans permits the borrower to pay interest only on the amount of money used at the time. This is a savings benefit for the borrower. Although the borrower may have a total construction limit of $500,000, for example, he or she would only be required to pay interest on the 25% of the loan that is used. However, as additional installments are drawn, the interest-only payments will gradually increase.
ww.gatlantic.comConstruction loans are not like regular mortgage loans. With a construction loan, the borrower is not provided with all of the money up front. The borrower receives the loan in installments. The reason for this is because construction loans do not require collateral for the loan as regular mortgage loans that receive the actual house as collateral in case the borrower can not pay the loan back. Construction loans cannot take the house as collateral because the house isn't built yet and this is a very risky venture for lenders because so many things can go wrong in the process. The house may never get built for some reason or have to be halted in the middle for some reason. Therefore, lenders supply the loan in installments to limit the risk.
www.homerefinow.comAfter construction is completed, payment is due for the entire amount borrowed. Most borrowers, initially, obtain a mortgage loan before even inquiring about a construction loan to make sure that the construction loan is paid once the construction of the home is fully completed.
