Construction Loans

A construction loan, releases funds during stages of the construction.  These stages can include the completion of the property’s framework, paint job and so on. The property’s existing value and on-completion value for every stage of the construction is used to calculate the amount that the lender is willing to give the borrower.

Usually, lenders are not sold in owner builders as a the owner may have limited building experience. Some of these potential risks are the inability to create funds for the completion of the property, overcapitalizing, getting costly errors and going over the budget.

In a construction loan, interest is not charged until an initial payment is made. From there, payments are usually calculated under an interest-only variable terms and the value is based on the amount that will be withdrawn. Once the project is completed, the borrower may have an opportunity to switch loans if the lender will permit.

Normally, a construction loan has three to six progress payments. To determine if the progress status has been satisfied, the builder will send an invoice and the lender will send a representative to determine whether the status in question is completed. Once they have determined that it is completed, the lender will release the payment.

There are lenders that pay the builder when a release form stating that the certain construction stage has been completed has been signed. Therefore, it would be better to consult with an architect to check if the work status in question has been satisfied. Before the final payment is given, it is best to have a final valuation of the construction stage.

When applying for a construction loan, the borrower must provide his financial and income information to the lender. The lender might also request for the blueprints of the architect and the engineering estimates for the property. Also required for the application of a construction loan are the building approval from the council, insurance of the building and the builder and a fixed-price contract.

Other key information like environmental assessment of the area may also be needed depending on the construction’s location. Once the requirements mentioned above and the satisfactory end-value has been met, an unconditional approval from the lender is very likely to happen.