Information on Home Construction Loans
Home construction loans have long been among the favorite products of local and regional banks in the United States. Bankers who specialize in construction lending usually know their markets well and are qualified to work with the builders, specialist-contractors and attorneys in their communities on good home-building projects. Bankers and other lenders tend to view home construction loans favorably because they are typically well secured, profitable and short-term (one year or less).
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Features
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A home construction loan is an interim loan that is disbursed to a builder according to a draw schedule, with a certain number of completion stages. During construction, the lender holds a first mortgage on the property. When construction reaches each predetermined stage, the builder applies to the lender for a draw. The borrower pays only interest on disbursed amounts during the construction phase. After completion of construction, the loan is paid in full from proceeds of a long-term mortgage loan. An official certificate of occupancy, issued by the appropriate municipal authority, signifies completion.
Types of Loans
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The borrower may elect to obtain a "construction-to-permanent" loan commitment at the outset. The lender may prefer this arrangement because it promises that the construction loan has a firm takeout or repayment, provided that a certificate of occupancy is issued. This arrangement may have a single closing, which is a money-saving feature for the borrower. There are many variations of these combination loans. Alternatively, the borrower will obtain his long-term financing while construction is underway.
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Interest Rate
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Construction loans bear interest at variable, or floating, rates (i.e., increments above the prime rate or some other benchmark rate). The prime rate is the base rate of interest charged by a commercial bank to its most creditworthy corporate customers. Interest rates on construction loans can also be based on Treasury rates (i.e., interest rates on securities issued by the U.S. Treasury).
Loan-to-Cost Ratio
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Banks and other lenders are averse to making construction loans for 100 percent of a project's cost. For that reason, they expect borrowers to contribute equity, in the form of land or down payments, of up to 20 percent of the project's cost. Cost categories include all construction costs, closing costs, inspection fees and reserves for contingencies and interest.
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References
- Photo Credit House gathers from gummed a bar. image by Vladimir Kolobov from Fotolia.com
