Unlike permanent home loans, construction loans are temporary loans expressly for the purpose of financing the construction of the property improvement. Usually for a period of time like 1 year, they are intended to be paid off with permanent financing at the projects completion. This is referred as a "take out loan". Many lenders will provide both loans at the beginning of the project.
A construction loan is usually a variable-rate loan priced at a spread to the prime rate or some other short-term interest rate. The lender or their representative will make inspections at predetermined stages of completion. An established draw schedule based on these stages of construction is used to disburse money. Interest is charged on the amount of money disbursed to date.
Another variable in construction loans is how much of the project cost the lender is willing to lend. If you already own the land, then that can be considered as equity in the construction project. Many lenders require an equity position in the project much the same as a lender requiring a down payment on a purchase. A lender will need to see cost estimates, plans and approvals from the local planning commission and building department in addition to financial qualification.
Someone contemplating a construction project should meet with the lender during the initial planning stages rather than wait until plans and other details are completed. Brookside Associates has both commercial lenders and private funding sources for construction loans. Contact us to discuss your project.
