{"id":4624,"date":"2021-11-28T08:26:08","date_gmt":"2021-11-28T08:26:08","guid":{"rendered":"https:\/\/loanbase.com\/uncategorized\/construction\/"},"modified":"2023-11-16T19:50:58","modified_gmt":"2023-11-16T19:50:58","slug":"construction","status":"publish","type":"post","link":"https:\/\/loanbase.com\/learn\/loans\/construction\/","title":{"rendered":"Construction Loans: What They Are & How They Work"},"content":{"rendered":"
If you\u2019re looking to build or renovate a home, you may consider using a construction loan. A construction loan is a short-term loan designed to finance the cost of building or remodeling your home. These loans typically consist of two parts: an initial \u201cdraw\u201d period, when funds are disbursed as needed, and a \u201crepayment\u201d period, during which the borrower must pay off the loan balance in full. We\u2019ll walk you through how construction loans work so you can decide if it\u2019s right for your needs.<\/span><\/p>\n A construction loan is a loan that finances the cost of building or remodeling a property. Homeowners and developers can use this type of financing to pay for labor and materials, permitting fees, landscaping, and many other costs associated with constructing a new home or commercial building. Depending on the location, type of property being built or remodeled, and the projected value of the property post-construction, the loan may cover up to 100% of the project\u2019s costs.<\/span><\/p>\n The most significant difference between construction loans and conventional mortgage loans is that a construction loan must be paid off at the end of the building project. In contrast, a mortgage loan is typically repaid over a longer period of time. In many cases, borrowers pay off construction loans by refinancing the balance into a long-term fixed-rate mortgage\u2014but this isn\u2019t always the case.<\/span><\/p>\n Additionally, lenders often require collateral for a construction loan. This collateral may include assets such as the parcel the borrower is building on, equipment, inventory, or other assets owned by the homeowner or builder.<\/span><\/p>\n Construction loans typically involve two separate types of financing: an initial short-term loan and\u2014once the project is completed\u2014long-term permanent financing.<\/span><\/p>\n The initial short-term construction loan covers the cost of getting started on the project. This money helps to fund land purchases, permits, architectural plans, surveys, soil tests, and other necessary expenses before actual construction can begin.<\/span><\/p>\n The second loan\u2014permanent financing\u2014is taken out once construction is complete. This type of loan typically comes with a longer repayment term and lower interest rate than the initial short-term loan. The permanent loan also covers the costs of professional inspections, title insurance, and other closing expenses associated with obtaining a mortgage for the property.<\/span><\/p>\n In some cases, lenders may offer an all-in-one construction loan that combines both stages of financing into a single package. This format can simplify the financing process and reduce paperwork for borrowers who need immediate access to funds.<\/span><\/p>\n Construction loans are often available from local banks and credit unions. However, they are also available through online lenders and brokers that specialize in real estate construction financing.<\/span><\/p>\n Construction loans come in many shapes and sizes, depending on the type of work, the type of property being built or remodeled, specific lender policies, and individual borrower needs. No matter the type of construction loan you choose, it is essential to understand all the terms and conditions before signing any agreements. Be sure to work with a reputable lender who can help guide you through the process and answer any questions you may have.<\/span><\/p>\n Common types of construction loans include:<\/span><\/p>\n Construction-to-permanent loans are loans that combine the financing of a construction project and the long-term mortgage loan into one package. This type of loan is ideal for borrowers who need immediate access to funds and want to avoid separate applications and paperwork for each financing stage. The loan begins as a short-term construction loan and converts to a permanent loan once the construction is complete.<\/span><\/p>\n Construction-only loans are short-term financing solutions specifically designed for the construction of a new home or other property. These loans provide borrowers with the funds they need to cover the costs of materials, labor, and other expenses associated with building a new structure.\u00a0<\/span><\/p>\n Construction-only loans typically have higher interest rates than mortgage loans but can be used to fund projects that don\u2019t qualify for traditional loan products. This type of loan is best suited for those who want to build their own custom home or renovate an existing property without taking out a large mortgage loan.<\/span><\/p>\n Renovation loans are tailored to individuals or families who need to finance renovations to an existing property. These loans are typically shorter-term solutions, with repayment terms of one to five years, and provide borrowers with the necessary funds to cover the cost of materials, labor, and other expenses associated with remodeling or renovating a home. Renovation loans can also have higher interest rates than traditional mortgage loans and may require additional collateral, such as a second lien on the property.<\/span><\/p>\n Bridge loans are a type of financing used for borrowers who need immediate access to capital but don\u2019t yet qualify for a permanent loan\u2014often because they need to sell another property to qualify for a new loan. In these cases, bridge loans can provide short-term financing, usually between one and two years, to cover the cost of a project until the borrower can secure a more permanent financing solution. These loans can offer flexibility and favorable terms for borrowers who qualify but typically have higher interest rates than traditional mortgage loans.<\/span><\/p>\n Owner-builder construction loans provide financing to individuals or families who plan on building their own homes. Unlike traditional mortgage loans, these loans do not require the borrower to use a licensed contractor, allowing them to manage and oversee the project themselves. These loans are usually short-term solutions, with repayment terms of one to five years, and typically require the borrower to provide collateral such as a second lien on the property.<\/span><\/p>\n End loans are best for developers who have finished building or renovating a property and want to refinance their short-term financing into a longer-term loan. These loans come at the end of a construction project (hence the name). They are used by borrowers to pay off short-term construction financing and repay the balance over time.<\/span><\/p>\n Construction loans provide financing for the construction of a new home or other real estate property. These loans typically cover a wide range of expenses, including materials, labor, permitting, and additional costs related to inspections or other items connected with construction.\u00a0<\/span><\/p>\n Depending on the loan and the lender, some construction loans may require borrowers to use licensed contractors for specific tasks. Borrowers may also need to provide additional collateral, such as non-retirement savings or a lien on another property.<\/span><\/p>\n To qualify for a construction loan, borrowers must meet certain eligibility requirements. Generally speaking, these include having good credit and reliable income sources, as well as collateral\u2014typically a first or second lien on the property being built or renovated. Construction loan requirements may vary by lender, but these are the most common:<\/span><\/p>\n Getting a construction loan is a bit more involved than a conventional mortgage. Here are the steps to get a loan to finance building or renovating a property:<\/span><\/p>\n Before applying for a construction loan, it is important to consider the following:<\/span><\/p>\n Construction loans are a great option for those who want to build or remodel a property without using their own cash to cover expenses. Borrowers can enjoy the convenience of a single loan solution by obtaining an initial short-term loan to cover the costs of getting started and then refinancing with permanent financing once the project is complete. While construction loans may require more paperwork than traditional mortgages, they\u2019re often worth it for those seeking flexibility in financing their dream home or commercial building.<\/span><\/p>\n <\/p>\n","protected":false},"excerpt":{"rendered":" If you\u2019re looking to build or renovate a home, you may consider using a construction loan. We\u2019ll walk you through how they work so you can decide if it\u2019s right for your needs.<\/p>\n","protected":false},"author":12,"featured_media":9928,"comment_status":"closed","ping_status":"closed","sticky":false,"template":"","format":"standard","meta":{"content-type":"","city-title":"","footnotes":""},"categories":[43],"tags":[59,82],"yoast_head":"\n
\nWhat Is a Construction Loan?<\/span><\/h2>\nConstruction loans vs. mortgage loans<\/span><\/h3>\n
\nHow Do Construction Loans Work?<\/span><\/h2>\n
\nTypes of Construction Loans<\/span><\/h2>\nConstruction-to-permanent loans<\/span><\/h3>\n
\nConstruction-only loans<\/span><\/h3>\n
\nRenovation loans<\/span><\/h3>\n
\nBridge loan<\/span><\/h3>\n
\nOwner-builder construction loans<\/span><\/h3>\n
\nEnd loans<\/span><\/h3>\n
\nWhat Do Construction Loans Cover?<\/span><\/h2>\n
\nConstruction Loan Requirements<\/span><\/h2>\n\n
\nHow to Get a Construction Loan<\/span><\/h2>\n\n
\nWhat to consider when getting a construction loan<\/span><\/h3>\n\n
\nBottom Line<\/span><\/h2>\n