Construction Loans
Construction loans are used to build a new home or to complete major remodeling. Construction loans are more complicated than typical residential loans. Construction loans typically fall into four categories, land loans, contruction only loans, construction to permanent loans, and spec construction loans.
Lot Loans
Lot loans or land loans are used to purchase lot or piece of land, ususally for the purpose of building on the site. Most conventional lenders do not lend on land alone. However, I work with several niche lenders and private money lenders who do land loans. Land loans are risky for lenders because the property ususally isn't being used to its highest and best use. If a borrower defaults on a land loan, the lender gets stuck with the land which can take a long time to sell. Raw land or un improved land is harder to finance than improved land which has power, sewer, water and other services. Zoning also plays a part in determining the risk of land loans. If you intend to build a homes on the land, and the land isn't currently zoned for residential building, then you may have to wait years for a possible rezoning, which carries a higher risk. If the property has residential zoning, the lender knows they will be paid back once the homes are built and the structures are financed with permanent loans. Most lenders will require at least 20% and as much as 50% down to purchase the land.
Construction Only Loans
Construction Only Loans are short term loans used to finance the construction or major remodeling of a property. Construction Only Loans are short term loans, that typically have an interest only payment. During the course of construction, the owner or builder receives draws at various milestones. Once the milestone has been reached, the owner or builder may draw more funds for the next stage of construction. When the construction is complete, the borrower refinanced the Construction Only Loan into a permanent loan.
Construction to Permanent Loans
Construction to Permanent Loans or one-time-close construction loans combine the construction loan, the permanent loan and in some cases the lot loan into one transaction and closing. This saves the borrower a significant amount of fees and hassles by having only one set of fees, and commissions instead of two or three. With increasing programs and reduced documentation requirements, these loans have become very popular in recent years.
Spec Construction Loans
Spec (Speculative) Construction Loans are short term loans used by builders or investors who will be building a property intended to be sold when the construction is complete. Spec Construction Loans carry a higher risk than other construction loans, since the borrower isn't going to occupy the property. The lender has to wait for the property to be sold before they get thier money back.
Appraisals for Construction Loans
Appraisals for Construction Loans are more complex and more expensive than typical appraisals. The appraiser has to estimate a value on a property that doesn't yet exist. In many cases, the appraiser has to update the appraisal thorugh out the construction process. The appraisal on a construction loan is vital as is determines how much money will be need for a down payment and reserves.
