A Beginner’s Introduction into Home Construction Loan
A Beginner’s Introduction into Home Construction Loan
Kenn Fong
A home #construction loan# typically covers construction costs, the completed project, or a combination construction and permanent mortgage plan. The borrower will need to do their homework in deciding which method best suits their needs.
HOME BUYERS
Purchasers tend to seek traditional home mortgages from lenders when buying directly from the builder. A traditional mortgage uses the equity of the home and property as a guarantee of the loan.
The buyer has the option to obtain a construction home loan for the construction period. The time allotted for construction is generally six months to one year. The buyer will then be required to obtain a standard home mortgage. This option can leave a buyer scrambling to find two different lenders. The interest rates might vary greatly and the added costs of two closings should be considered.
Combination loans offer the best of both worlds. They cover the construction costs and become the permanent mortgage once the project is complete. This type of loan removes the ability to shop around for the best interest rates, so it is best to get quotes before deciding which option is best.
HOME BUILDERS
Home builders often seek loans that help cover the costs of construction. They quickly pay these notes off after sale is complete. Lenders are able to loan up to ninety percent of the building costs, but the builder is expected to add the remainder of needed cash themselves. Personal investment in a building project is one way lenders add incentive for the repayment of the loan.
MANAGING LENDING RISKS
These loans are tightly managed to ensure the project makes it to completion. Funds are held in an account and the borrower may draw amounts as needed to pay for contractor fees and materials during construction. Some lenders allow online draws, but many want paperwork to cross their desk to ensure proper use of all monies. Periodic inspections ensure that the work is progressing on schedule.
Some tried and true methods employed to reduce project failure risks are environmental and soil inspection, quality appraisals of building material and strict adherence to building codes. Prompt and proper payment of workers and contractors avoids the legal hassles of liens.
Quality home construction loan options are available to both purchasers and builders. Finding the perfect loan for any budget and project is as easy as asking what is available to suit your needs.
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