Construction loans are a type of loan that is taken out for the purpose of constructing a property. It can be an individual building their own house, a businessperson constructing a building for their business, or an income producing property built by an investor.
Requirements
When someone applies for a loan, one of the construction loan requirements is that they provide proof that they will be able to make the monthly payments once the construction is completed. In most cases, once the construction loan requirements are met, the borrower will be able to draw money from their account in order to pay for supplies and labor costs. Some lenders will allow the borrower to pay the invoices right away and in other cases, the invoices will need to be submitted to the lender before being paid.
Part of the construction loan process is that besides the amount of the cost to build the property, an amount will be added to the loan to cover the interest during construction. The amount of the interest is stored in an account called an "interest reserve." During construction, the monthly payments are taken from this account each month so the borrower will not need to make monthly payments on their own until construction is completed.
One of the requirements as part of the construction loan process for businesses applying for construction loans is there will be a special appraisal required to make sure the business will be able to afford the monthly payments once construction is completed. An appraisal will also be one of the construction loan requirements for an investor constructing a building to rent out. This can apply to either a commercial building to rent out or a condominium or townhouse. With a condominium or townhouse, the lender will look at the planned rent is and determine if they will be able to make the monthly payments to repay the construction loan. As a final step in the Construction loan process, in most cases, once the construction is completed construction loans will be converted into a mortgage.
Disadvantages
One of the disadvantages of the construction loan process over a regular home mortgage is that the interest rates may be higher. Another disadvantage is that there are limited lenders that offer construction loans. Once of the construction loan requirements with most lenders is proof that the borrower will be able to make the monthly payments on the amount they are applying to borrow. Construction loans are usually for a period of 6 to 12 months. So you either need to pay it off at that time or in many cases you can convert it into a 15 to 30-year mortgage. One of the advantages of a construction loan is that with each draw, you will receive an updated statement of the original budgeted amount, draws made and the balance left to draw. With a construction loan, you are able to hire your own subcontractors and control the quality of construction. You are also able to purchase materials from suppliers of your choice.
You may be surprised that you are able to obtain bad credit construction loans. As with the limited number of lenders that deal with construction loans, that list will get even shorter when applying for bad credit construction loans, but some lenders will to work with you. In some cases with bad credit construction loans, the term of the loan may be from 5 to 20 years instead of the normal 6 to 12 months. This will the monthly payments lower if you need to apply for bad credit construction loans.
