What Is A Construction Loan

Just what is a construction loan? Borrowers interested in building the home of their dreams need to understand the differences between loans that are geared toward building and the traditional mortgage. Whether a consumer wishes to purchase a handyman's special and doing a total rehab or wants to buy a piece of real estate and adapt it for business purposes, understanding just what is a construction loan can be crucial. Some lenders have specific requirements when it comes to the kind of property that can be financed. Other financial institutions will refuse to provide lending opportunities to borrowers who wish to purchase real estate that does not meet the institution's standards. Still other lenders offer financing that allows a borrower to attain sufficient funds to both purchase the property in question and pay the costs that are involved in the total rehab process. By combining the needed funding into one loan, a builder can save a good deal of money in the area of closing costs, fees and other expenses.

The details of understanding just what is a construction loan can begin with the reasons and details behind the planed building project. Most lenders will want to know all about the intended results and the plan for achieving those results before these lenders will provide financing. In addition, loans that are earmarked for building tend to have some major differences from the traditional mortgages that homeowners may be familiar with. Most of these loans have some basic things in common. When trying to grasp the intricacies of what is a construction loan, a potential borrower might benefit from first looking at these features. Typically, payments for building loans are made on the interest only in the initial stages. These interest only payments will generally last for the duration of the construction period. After a home has been granted a certificate of occupancy, the loan will generally become due and will be paid off by a mortgage loan. Often, loans for building purposes are offered as variable interest rate loans. A schedule will be set up in advance to determine at what point the rates will change during the various stages of building and how and when the money will be disbursed.

Among the many differences between a construction loan and a mortgage could be the length of time that loans geared toward building purposes will last. A complete answer to the question "what is a construction loan" will include the duration of such loans. Building loans may be paid over a period of a few months, while a traditional mortgage can last for decades. Construction loans are generally meant to provide temporary financing during the building process. The mortgage financing will come along after the building has been completed, and will be used to pay off the original financing that was utilized for building. Of course, there can be many variations that are offered by different lending institutions. Usually, a borrower will be required to apply and receive approval on a residential mortgage before they can gain funds that will be used for building purposes. Another feature to consider when understanding just what is a construction loan might be the building/permanent loan. In this type of financing, the mortgage and the building loans are tied together. Such an approach will make the application process much easier and may even reduce closing costs. This happens because the potential borrower will actually be applying for one loan rather than having to go through the headache and hassle of applying for two loans.

Consumers who feel that they understand what is a construction loan may not be aware of all of the opportunities that are offered in this kind of financing. Some borrowers have the mistaken believe that construction loans are meant to be used for building new homes only. The truth is that any time that a borrower shows interest in purchasing property that is not ready to be immediately occupied, building loans can offer substantial savings during the renovation process. While the construction or rehab work is going on, the borrower will need to only make payments on the interest. This plan was designed to free up a buyer's funds to pay for rent or other living expenses that allow a family to keep a roof over their heads while a new home undergoes completion. Many financial institutions will work with the borrower to coordinate the time used to build the structure with the timing of the mortgage that will pay for the home over the long haul. From beginning to end, creating a new home can be an exhausting process. The Bible illustrates how God gives strength to the righteous. "Fear thou not; for I am with thee: be not dismayed; for I am thy God: I will strengthen thee; yea, I will help thee; yea, I will uphold thee with the right hand of my righteousness." (Isaiah 41:10)

For a potential borrower to completely grasp just what is a construction loan, they might want to look at the different types of loans are available in this category. These loans could come under the category of owner builder financing, construction to permanent financing, remodeling loans, or commercial/subdivision loans. Owner builder financing is usually offered to borrowers who will also be acting as a general contractor on the property. Building to permanent loans are one time loans that combine the attributes of both home mortgages and building loans. Remodeling loans provide financing for consumers who wish to remodel or add rooms on to an existing property. A commercial/subdivision loan is generally used for such commercial projects as the building of apartments, retail constructions, or industrial loans.



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