Business Construction

Know About Construction Loans


Construction loans are story loans, which mean that the person lending the money needs to know the story behind the planned construction. The lender will want to know what you want to accomplish, why you want what you want, and how you are going to achieve your goal. If we look at it in a broader sense, construction loans are those loans where the proceeds is used to finance construction projects. In the United States financial services industry, construction loans are used to describe a type of loan that is designed for construction. The defining features of these loans are proper guidelines and monitoring to ensure that the project is completed, and that repayment can start. Unlike other loans, construction loans are not meant to be long-term loans.


A construction loan has certain features. First, they require interest only payments. Construction loans are normally variable-rate loans priced at a spread to the prime rate. The person that needs the loan, the contractor and the lender establish a well-defined schedule. This schedule is based on the different stages of the construction, and an interest rate is charged on the amount of money accordingly. Another thing that needs to be considered in construction loans is the amount of money that lenders are willing to lend.

Some homeowners use construction-to-permanent financing programs. The construction loan in this case is converted to a mortgage loan after the certificate of occupancy is issued. Depending on your perspective of interest rate trends, you could also purchase a rate-lock agreement that would be valid throughout the expected completion of the construction.


With the rapidly increasing trends in technology, one now can obtain a construction loan from the prime banks and sign all related loan documents at local companies or escrow office. Just like any other product, construction loans have best, good and downright bad loans. Here’s how you can get a construction loan.

Be prepared before you get a loan. This will help you estimate if the required loan amount is within your budget. Planning will help you know whether or not you qualify before you go out to buy the land. Remember that majority of the loan products normally go alongside banking guidelines. These guidelines help he loan officers to coincide with customer qualifications.

Internet reserves are added to loan amounts to make the monthly payments on the loan. Payments are made from the interest reserve account. The reserve is then added to the construction loan amount. However, if you do not wish to add interest reserves to your construction loan amount, you can request to make your own monthly construction loan payment. You can also have contingency funds that are added to your construction loan amount in case you need more money.

A way to get different choices regarding construction loans is to shop around. Call local banks and contact the construction loans department. Try to find out the deals that best suit your requirements. You also need to ensure that the construction lender is experienced, that’s the first thing that will prove helpful. The better the experience, the better will be your deal. Although some loan officers are salaried employees, most loan officers are salespeople that usually have one main goal in mind, and that is the commission that they are going to get.

The first thing a loan officer will want to see is a completed loan application. The loan officer will use this along with other documents to determine whether you qualify. The analysis then will yield an income to debt ratio, and this ratio should not exceed 36% to 45% of your monthly income.

Always ask if the construction loan rate is locked upfront or floating during the construction loan period. You also need to ask if the rate during the construction loan period and the conversion to mortgage period is the same. . If you choose a loan that does not allow you to lock in upfront, the interest rate may end up higher along with your monthly payment. Be careful. Written work is also important. Construction loans require more paperwork, and this paperwork needs to be safe.

Tips and comments

Make sure you get construction insurance. There is a course of construction and general liability and Workman's compensation is only required if your builder has employees. Also ask your loan officer to provide you with a copy of the estimated construction loan budget.

Besides considering everything else, you have to make sure that your loan officer has structured your construction loan properly. This is very important and can save you from a lot of issues in the future.

By Khurram Hussain, published at 03/14/2012
   Rating: 4/5 (11 votes)
Know About Construction Loans. 4 of 5 based on 11 votes.


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