Construction Loans

A construction loan is a type of short-term financing that provides funds for building a new property or undertaking significant renovations. It works by providing funds in stages or “draws” as the construction progresses. Borrowers typically make interest-only payments during the construction phase and can later convert the loan into a long-term mortgage.

Qualification criteria for construction loans may vary among lenders. Generally, lenders consider factors such as creditworthiness, income, construction plans, project budget, and the borrower’s ability to repay the loan. A detailed construction plan, cost estimates, and a reputable contractor are often required.

A draw schedule is a predetermined timeline for releasing funds to the borrower or contractor at specific stages of construction completion. It is agreed upon between the borrower, lender, and sometimes an inspector. The loan disbursement is typically tied to milestones, such as pouring the foundation or completing the framing, to ensure progress before releasing funds.

Interest rates for construction loans are generally higher than those for traditional mortgages due to the short-term nature and increased risk of the loan. The rates can be fixed or variable, depending on the lender and loan terms. Loan terms typically range from a few months to a few years, depending on the complexity of the project.

Yes, some construction loans offer a construction-to-permanent option. This allows borrowers to seamlessly transition from the construction phase to a long-term mortgage once the construction is complete. It eliminates the need for a separate mortgage application and approval process, saving time and effort. The loan is converted based on the agreed terms and conditions established during the construction loan agreement.