CONSTRUCTION LOAN

Short-Term Financing: Construction loans are typically short-term loans with a duration that covers the construction period, which may range from six months to a year or more.

Interest-Only Payments: During the construction phase, borrowers often make interest-only payments on the funds disbursed for construction. This helps manage initial costs before the home is completed.

Draw Schedule: Construction loans operate on a draw schedule. Instead of receiving the entire loan amount upfront, borrowers receive funds in installments (draws) based on the completion of specific construction milestones. Lenders may inspect the progress before authorizing each draw.

Two-Phase Process: Construction loans often involve a two-phase process. The first phase covers the construction period, and once the construction is complete, the loan may be converted or refinanced into a traditional mortgage, known as the permanent or end loan.

Collateral and Approval Process: The property being constructed serves as collateral for the construction loan. Lenders typically assess the borrower’s creditworthiness, construction plans, budget, and qualifications of the builder during the approval process.

Interest Rates: Construction loan interest rates can be variable and may be higher than those for traditional mortgages. The rates may be influenced by market conditions, the borrower’s creditworthiness, and the lender’s policies.

Construction-to-Permanent Loans: Some lenders offer a construction-to-permanent loan, simplifying the process by combining both the construction and permanent mortgage phases into a single loan. This eliminates the need for a separate loan after construction is complete.

Builder Requirements: Lenders may have specific requirements for builders, ensuring they are qualified and experienced in construction. The builder may need to provide relevant documentation and adhere to the construction plan.

Inspections: Lenders often conduct inspections at key construction milestones to ensure that the work is progressing according to the approved plans.