construction loans how they work

Many times, when a land owner goes to build a residential or commercial structure they have to obtain some type of construction loan. Construction loans can be obtained through individual or organizational entities, and the funds can be applied towards any expense that is related to the construction of a residential or commercial structure. However, different types of construction loans must be obtained depending on what type of structure is being built.

Construction Loans for Residential Properties

There are two different types of residential construction loans: Construction Only Loans and Construction to Mortgage Loans.

Residential construction loans are not like mortgage loans because mortgage loans are not short term loans. When a borrower obtains this type of loan, they are expected to pay the interest on the loan during the actual construction period of the home. The interest rate is not fixed; it is variable and depends on the prime lending rate.

The credit score of the borrower is what determines the amount of funds the borrower will be able to access. In most cases, a good credit score reflects the ability to gain a large amount of money. If a borrower owns the land they are building on, then most lenders will consider the land as an equity amount.

Residential construction loans are also unlike mortgage loans because funds are only provided to the borrower once a portion of the residential property is completed. In most instances, this type of loan is provided to the borrower in four separate portions. In order for each portion to be provided, the builder must provide the lender with proper documentation that proves they have completed certain progress on the home. One reason these types of loans are provided in four different portions is because the borrower never has to provide collateral for the loan during the construction of the home. After a borrower has completed the building of their home, they must then provide their lender with an occupancy certificate.

Construction Loans for Commercial Properties

Most people that build retail centers, warehouses, apartments, or industrial buildings must obtain some type of commercial construction loan. These types of loans are meant to assist a person in building a profitable business or corporation. These types of loans may also be used as a refinance loan, as a way to purchase land, or a way to expand an already existing business or corporation. When a borrower obtains this type of loan to expand their business, the already existing business property is used as collateral for any borrowed funds.

Like a residential construction loan, commercial loans are also short term loans, usually lasting for about 2 years. Many commercial construction loans have acquisition costs associated with them.

Any person looking to obtain a commercial construction loan should first apply with a commercial bank. If they are not approved, then they should turn to other alternatives, which most times will include private or sub-prime lenders. However, private lenders usually charge higher interest rates than commercial banks.

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