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The Basics of Construction Loans for Rookie Investors

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What are the basics of construction loans?

Constructions loan are short term interim loans for financing the cost of construction. The lender advances funds to the builder as the work progresses.  They are either obtained by the home-builder or prospective owner.

With a construction loan, the lender needs to know exactly what is going on with the building of the home.  To gain approval, the lender will want to know the timeline of completion the details of the actual construction. This is sometimes called the “story” behind the loan.

What are the different kinds of construction loans?

There are two kinds of construction loans: one-time-close construction loans and two-time-close loans.

What are the pros and cons of one-time-close loans?

Pros of one-time-close construction loans:

  • The borrower pays one set of closing costs.
  • Borrowers are approved for construction and permanent financing at the same time.
  • Multiple options for permanent financing give the borrower flexibility.

Cons of one-time-close construction loans:

  • If the borrower spends more than the construction mortgage, they may need to take out a second loan and pay additional closing costs.
  • Permanent rates may be a little higher than with a two-time-close loan.

What are the pros and cons of two-time-close loans?

  • Borrowers have flexibility to modify their plans and increase loan amount during project.
  • Mortgage rates are often lower than in one-time-close loans.
  • Borrowers are typically free to shop around for permanent financing.

Cons of a two-time-close loan

  • Borrowers need to be approved twice and pay closing costs twice.
  • Borrowers face risks if their circumstances change when they apply for permanent financing.
  • If the borrower doesn’t get approved for permanent financing, they could face foreclosure.

 Contact the specialists at HML Investments today for more information about construction loans.

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