The Things you Need to Know about a Home Construction Loan

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.

BUYERS

When purchasing a newly constructed home from a builder, the buyer generally seeks a traditional permanent mortgage from lenders. It is a standard home loan with the home used as equity to secure the note.

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.

Another option is to seek out a combination loan. Once the construction is complete, the loan becomes the permanent mortgage. This method is straight forward, yet takes away the flexibility of shopping around for better rates. It is best to get quotes for both options before making a final decision.

BUILDERS AND DEVELOPERS

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.

RISK MANAGEMENT

Lenders oversee these loans closely to steer projects to successful completion. Borrowers are allowed to withdrawal funds when needed to pay construction material and contractor fees. Many lenders will want a paper trail and require notification of reasons for withdrawal, while some do allow online fund draws. Periodic inspections are necessary to check on the construction progress.

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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