Construction Loan Info

FROM THE SUPERPAGES.COM

Technically speaking, a mortgage construction loan is any loan where the money borrowed is used for construction. However, a mortgage construction loan is a term-of-art that is usually only used for special types of mortgages. This industry-specific definition for a mortgage construction loan refers to a loan in which the collateral is the value that will exist once the property is built.

How Does a Construction Loan Work?

Mortgage debt is usually considered secured debt because the home or property purchased with the money lent serves as collateral. However, in the case of a construction loan, the property does not exist yet. Therefore, the loan is based on the value of the property once it is finished.

Mortgage construction loans are available in both residential and business settings. Residential buyers can use a construction loan to finance a new-home build. The amount of money that the lender lends them is based upon the estimated value of the home once it is complete and this money is used to build the home.

Commercial buyers can also take construction loans to build property that they intend to sell immediately upon completion or property that they intend to use to generate a profit. Again, the loan amount granted is based on the value of the completed project, not on the current worth of the project.

Funds are distributed, usually directly to the contractor or person building the project, at set intervals during the construction process. This payment arrangement and schedule must be negotiated between the lender, buyer and contractor prior to issuing the construction loan.

After the project is completed, the mortgage construction loan usually converts into a standard mortgage, with the newly constructed building or home serving as the collateral for the now-secured loan.

Qualifying for a Construction Loan

Construction loans can be risky for the lender, as the estimated value of the finished product is only speculative. Many lenders require buyers to come up with a large cash sum and use that money to partially finance the project. Most lenders also require good-to-excellent credit from buyers before a buyer can qualify for a mortgage construction loan.

Lenders will also want to ensure that you can afford to pay the mortgage payments once the loan converts into a standard mortgage. Therefore, they will usually verify your monthly income and do calculations to determine your debt-to-income ration and your ability to ultimately pay back the mortgage. This analysis is similar to the type done any time you take a mortgage, although lenders may be more stringent in their guidelines when issuing a mortgage construction loan due to the increased risk associated with a speculative loan.