Types of Home Construction Loans
Three types of construction loans are typically granted in the United States. These construction loans are for building a personal home, to build the premises where business owners will operate their businesses and for apartment buildings or houses that will be rented to tenants.Construction Loans for Building a House
When people would like to construct their own homes, they will obtain a construction loan for this purpose. This loan is not a mortgage, so these builders will need to offer more than they will when they seek to convert the construction loan into a mortgage. The main criterion that the lenders will need is the builders’ proof of income so that they can be certain these builders will be able to make timely repayments every month after they have moved into the home.
Construction Loans for Operating a Business
If business owners are seeking a construction loan, they will use the building to earn profits from operating a successful business. These business owners will be asked to present a business plan that will demonstrate to the lenders how they plan to earn the money they will need to repay the loan. If these business owners successfully do this, they may qualify for the money they need to begin building.
Construction Loans for Rental Properties
Those who are building homes to rent to others will have similar requirements as the business owners described above. These business people will need to have completed an analysis of the rent they will be able to charge in the area in which they will build the property. Included in this consideration would be whether or not people earning a certain income could afford to live in the building once it has been completed.
Construction Loans for Property to Be Sold
Sometimes, business people seek a construction loan to build property that they are going to sell to others right away. These buildings will require that the project be appraised so that the lenders will know what the building’s purchase price could be. Because these types of buildings will need to be sold very quickly after they have been built, there is more of a risk for lenders. Because of the higher risk, these borrowers are expected to place more of their own money into the project than the others.
The Typical Amount of a Construction Loan
A construction loan is one that generally offers business people a maximum of 85 percent of the amount needed to complete the project. The reason lenders will do this is because it makes it more likely that the project will be completed and the property will begin to be used for its purpose. If the builders do not have money invested in the project, they may not work as hard to make it a success.
The Building as Collateral for a Construction Loan
Another way that lenders protect their investments in a construction project is by retaining the property to be built as collateral for the loan. If the builders do complete the project but do not receive the profits or the rent they were expecting, they may default on the loan. In this case, the lenders will be able to take possession of the property to sell it as payment for the loan.
How the Construction Loan Is Disbursed
After the construction loan has been granted, lenders may offer the builders funds as they are constructing the building. Borrowers will be given a construction budget, and they will periodically request funds with which they will pay their contractors and their suppliers. By requiring that the money be spent in this way, the lenders are ensuring that the construction budget’s funds are actually being spent on construction.
Repaying Construction Loans
The borrowers will be approved for a set amount of money, but they will only be charged interest as they receive the money in the manner described above. The other feature common to construction loans is the interest reserve. The interest reserve is money that has been borrowed for the purpose of paying the interest on the construction loans, and is used to make these monthly payments until the building’s construction has been completed.
