A construction loan is defined as any loan where the proceeds are used to finance construction or building of any kind. If you are planning to apply for a construction loan, you have to know all the necessary things in order to avoid any difficulty.
The most basic thing to remember is that the lender will only loan up to 85 percent of the project costs, and the remaining 15 percent will be covered by the borrower. This is a strategy adopted by lenders in order for them to mitigate the situation wherein the borrower could no longer afford to pay. This means that they can sell the property at a value that would cover the amount of money being loaned.
Here is the basic step in planning for a construction loan:
- Determine if the loan is within your budget.
- Find the loan lender that offers the greatest deal for borrowers.
- Choose only the most suitable loan product.
- Know the options of loan construction. You can choose from 30-year deal, 15-year deal, 1-year deal, etc.
- Choose a broker (a representative for banks) that has a wide experience in such deal. The brokers get loans at wholesale rates and pass them to their clients at retail price. This means that you can have better deals with them compared to going to the banks on your own.
- Know if you are going to lock in your interest or not. This means that you have to decide what actions are the most appropriate for the situation. For example, if the rates are going upward, you have to lock it, conversely, let it hang if the rates are expected to go down.
- Consider which construction loan officers offer the smallest commission (also known as loan fee).
- Complete your loan application.
- Be careful when dealing with mortgage lending business as most are known for offering baits to its clients. This means the deal would seemingly appear advantageous for you. For example, the lender does not require you to pay for the loan fee, thinking that you are offered a great deal, you immediately agree, without realizing that the interest rates and costs are higher than usual.
- Be aware of the fact that your qualification will determine how much you can borrow from the lender. This means that if you have higher income, the higher your chance of being granted with a bigger loan.
- Ask for a copy of the construction loan budget. There is no room for passive borrowers as you might be taken advantage of by your loan officer.
Other things a borrower must know:
Funds are taken from the loan through a method called as “draw,” this is a system wherein the money is taken from the construction resource to pay for the contractors and material suppliers. This process will ensure that the money for the loan is properly used for the construction.
Most construction loans have extra funds that are safely stored in a locked account; this means that instead of paying each month during construction, the funds are just taken from the interest reserve. This process means less hassle to the borrowers as they are not required to shell out money every month during the construction.
