A construction loan is a loan in which the finances provided are used to pay for a real estate project. Hence it is a sort of short term credit which can be used for payment of materials as well as the labor costs required for building a home.
Construction loans are not the one’s which people know much about. So there are a few basic things which one should know before opting for a construction loan:-
- The first thing which one must know about a construction loan is the limit- limit as to how much the lender can actually lend. Based on this financial limit one should calculate as well as manipulate the whole construction project. One should have a really good estimation about how much the closing costs as well as other estimations would be.
- The next step is to select a good home design. For this one has to contact an architect who will charge a lot. After the plans have been set, one will get a nearly accurate representation of the project cost and depending on this one needs to adjust the budget.
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Then the borrower can approach the lender with the approximate costs as well as the plan.
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One should inquire about the loan convertibility. Some construction loans can be converted into a permanent loan. This enables some money saving options as well as it will be easy as it will be done through the same financial institution.
- There are a few documentation needed before a construction loan:
Set of the project plan.
Financial information needed to get a loan- income verification, credit reports etc.
Estimate of cost of project
Material information
Contractor bids.
However there are a few risks involved in construction loan:
- Repayment time – one thing is very clear that construction loan is a short term loan. Generally the loan term is from 6 months to a year. One thing which often goes unnoticed is the lock in feature. Lock in enables the borrower to be locked in your rate during the term so the borrower does not have to worry about rising costs during the construction.
- Lump sum- construction loans are not required to be paid in installments, but the entire payment is due at the end of the loan term. Hence the borrower must be ready with his cash reserves once the loan term is complete.
- Mode of reception – the financial aid provided is not given to the borrower in lump sum. This money is granted in different phases based on the percentage of completed work.
However construction loans get approved much quicker and they help in realizing one’s dream house.
