What is a construction loan?
With the many resources a lender can provide for financing a home, business or building from the ground up or even a remodel a common method of procuring money is called a construction loan. There are a number of different reasons this loan would benefit your financial needs. The lender and the borrower often have an established relationship that allows the loan to have more than just the borrower’s credit rating as the terms for the interest rate on the loan. When obtaining a construction loan the lender is able to take in account what the construction property will be used for in gaining profit. Upon completion of construction will the profit be attained by selling the property? Will the property be used as a rental unit? Based on your needs for a construction loans there are a number of factors can make a construction loan a realistic and intelligent option to help you complete your construction project.
A construction loan can be beneficial for investors for a number of reasons. Depending on the lender a construction loan can provide the financing to be short term in length. Meaning, upon agreement with the lender a loan can be anywhere from 3-6 months in the term of the loan. This is valuable for investors since the plan is to sell a property within a short time frame after it the construction is completed. When a loan is this short in length the borrower may also allow a variable rate in interests, depending on the relationship with lender. The interest rate can be on a graduated scale starting at a low level and then increasing as the months continue. Investors will have developed a loan with a specific bank or financing institution based on how often they are able to build and sell properties. For those investors the interest rates can be extremely low.
As for personal construction loans it can be a more difficult, but still advantageous process if you intend to remodel or build a property for personal use. As the real estate market has changed with the recent decrease in the market, credit scores that need to be obtained for a construction loans have increased as well. Prior to the decline in the real estate market construction loans were very useful in home remodels.
Should you require more money to build the house from the ground up a construction loan can help you to own not only the building but also the land the property is built on. A construction loan can guarantee that the contractors you have enlisted for the project will be paid on time for all the work they have completed. Upon an agreement with your lender this can also help keep your project on time. Money can be dispersed by setting milestones for completion. Once specific milestones are reached a certain amount of the loan can be dispersed to pay the contractors. With a construction loan for properties for personal the lender may require that you already have a residential mortgage with the lender. However once that is established, the loan may help you make your dream home that much better!
Construction loans can offer the borrower many benefits. This loan can allow for short term lengths from 3-6 months on the shorter end. This type of loan can also have a varied interest rate as well for those borrowers planning to sell the property. Lastly this loan can be for you if you plan on sticking to a strict schedule for completion. Construction loans can help you build your first investment property, or help you make your dream home more of a reality.