Construction Loans: Questions and Answers
It would seem that construction activity is still fairly high based upon the number of calls that I get from people about construction loans. There are a lot of calls from people just getting started, as well as from a number of seasoned "construction veterans." In a large number of those calls, I hear some common questions. So I thought that I'd answer a few of them here.
Q: How do construction loans work?
A: In general, just like every other loan. You sign loan documents and money is funded into escrow. In the case of a construction loan, only a portion of the total loan is released. The balance is released either in preset "stages" or as workers complete portions of the project according to a budget. The former is called a "draw" system and the latter is called a "voucher" system.
Q: How are the payments calculated and who makes them?"
A: Commercial loans have the added security of an income producing property providing the funds to pay the loan payments. For residential loans, it's the borrower's income. When a property is being built, there is no secondary source of repayment so the burden of payment would normally fall to the borrower. But lenders didn't want borrowers to use up all of their funds in case something went wrong with the project, so they created "interest reserves." This is a chunk of money set aside in the loan to do nothing but make the loan payments during the construction process. The payment is based upon how much money has actually been used or "drawn" at the time the payment is due. This is not the case for private money lenders. They calculate interest on the entire amount of the loan from the initial funding date.
Q: What's a contingency reserve?
A: This is another chunk of money set aside in the loan to protect you against cost overruns. Since it can take a year or more to complete a project, the prices used to estimate the construction budget become less accurate as time marches on. The contingency reserve is released a little bit at a time during the construction process to cover inevitable price increases.
Q: How do you calculate the maximum construction loan?
A: The maximum construction loan is based upon many factors: Property type, stabilized value at completion, total costs, and equity invested to name a few of the key concerns. For any given property type, there is usually a maximum "loan to costs" and a maximum "loan to value." The key is this: The largest permanent loan for which the property can qualify, assuming it is built and fully occupied or valued, will limit the construction loan. This is because the construction lender wants to be paid off at the end of construction and the way to do that is with a permanent loan. This does not mean that if the permanent loan exceeds the total costs of the project that you can get 100% construction financing. Just about every lender is going to look for 10% to 20% of the total costs to be funded by equity or cash from the borrower.
I hope that these few examples clarify some of the questions that you might have concerning construction lending. I'll cover more here in the future. If you should have a question that wasn't covered, email me at your convenience and I'll do my best to give you a complete answer.
Related Tags: loans, questions, and, construction, answers
WANT TO USE THIS ARTICLE IN YOUR E-ZINE OR WEB SITE? You can, as long as you include this complete statement with it: 'Craig Higdon, "The Investment Property Insider," works as a commercial mortgage broker. He publishes the weekly "Investment Property Insider" e-zine and blog, www.InvestmentPropertyInsider.com. Visit the blog and get a complimentary report on commercial financing techniques.'
Your Article Search Directory : Find in ArticlesRecent articles in this category:
- The Secrets to Getting Low Down Payment Car Insurance
Upon purchase of a new car, there is almost always a requirement to buy an auto insurance policy as - The Wisdom Behind Auto Insurance Comparison Quotes
No one in his right mind would not go for a good deal. In fact, everyone is out on their feet and ru - The Benefits of Auto Insurance Comparisons Florida
Insurance can be expensive. This is something everyone knows about especially in the sunny state of - Auto Insurance Florida: The No-Fault Policy
There are different kinds of car insurance offered by a wide range of providers today. Different sta - Finding the Cheapest Auto Insurance Companies
Everyone is asking and searching for the cheapest auto insurance companies available today. Consider - How do You Compare Private Health Insurance Cover in Australia?
Deciding what is the best and most affordable private health insurance cover can be easy if you take - How Payment Protection Insurance Was Mis-Sold
For over six years the issue of Payment Protection Insurance (PPI) and how it was mis-sold to custom - Finding Quotes For Auto Insurance Online
One of the many concerns when you are shopping for auto insurance is being able to get access to quo - How You Can Find the Best Auto Insurance Online
When it comes to renewing your car insurance you are going to quickly discover that there are a numb - Guidelines For Searching For Auto Insurance Online
The internet can be a great source of discounts and values related to auto insurance. However, many
Most viewed articles in this category:
- Trading Forex With Pivot Points
Forex Pivot Point Trading are used today by Forex Traders and are calculated on the previous days mo - Where To Search For Free Grants
Where do you look for free grants? The search must be thorough or it could be an exercise in futilit - The Connection Between High Blood Pressure and Salt
We are a society of Salt Addicts. It cannot be denied. When you look at the things we do and the pla - Tips For Avoiding HYIP Scams
Before knowing about HYIP Scams, refer to the functioning of HYIP or "High Yield Investment Programs - Getting Credit After Bankruptcy
Consumers do not have to live sans credit following a bankruptcy. By following certain steps consume - Tips For Choosing A Credit Card
Are you looking for that perfect credit card? If so, you may be confused about what exactly to look - Cheap Car Insurance For Teens Online
Many elements determine a car insurance policy. Car insurance companies look at the person's age, hi - What Exactly Is Free Grant Money?
You can apply for free grant money from various government agencies. But where exactly does this mon - Small Business Owners Marketing and Customer Service
Marketing can be time-consuming, but it doesn't have to be hugely expensive now, thanks to the Inter - Apply Online For A Credit Card - How To Choose A Card?
The best type of credit card for you will be dependant on how you intend to use the credit card. Are