If you are a home buyer and you have not found an existing home that meets your requirements you may decide to build your own home and will need to know, ‘How do construction loans work?’ First, a construction loan is a short-term loan. Once the construction is completed, the debtor will have to pay off the note or refinance the note. A traditional mortgage loan will be for a much longer length of time. Even the shortest traditional mortgage loan is for a 10 year period. A construction loan for a home would probably be for one year or less.
Another name for a construction loan is ‘story loan’. The individual will tell his story to the lender and based on that information the lender will choose the terms and make available the funds for the construction. The building process must be divided into increments and money will be disbursed at each stage of this building process. The lender must be convinced the debtor has the potential to pay back the construction loan. The applicant must have a good credit history and a higher credit score. If the applicant has collateral it will be even better. With a construction loan there is no existing structure that secures the note. This makes it riskier for the lender.
Construction loans are extremely customer specific, whereas a traditional mortgage will be relatively the same for a consumer with a similar financial situation. Most construction loans are variable rate and not a fixed rate and will have interest-only payments. The payments are generally due each month and the total loan is due at soon as the certificate of occupancy is issued to the owner. At this time, the owner will pay the note or finance the real estate with a conventional loan.
The lender who financed the construction may be the same lender who will offer you a conventional mortgage on the property. You will have already provided the lender with all the information required to obtain a conventional loan during the approval process for the construction loan. The basic difference between the information collected by the lender for the construction loan is the story about the construction process and the outline of the steps for completion of the building. You probably will have to negotiate a new rate of interest that is fixed and choose a term length for the loan that is offered for conventional loans. ‘How do constructions loans work?’ has been answered with enough information for you to navigate the application process with ease.