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How Construction Loans Work ?
Construction loans are basically known as ‘story loans’ in the business. Thus, before sanctioning a construction loan, the lender needs to know the whole story behind the construction. |
He will ask you about details like the rate at which you aim to finish construction, the reasons for the construction and so on and so forth. Due to this relativity, every construction loan is different. There exists no standardized construction loan like there are for standard mortgages.However, most construction loans have some common features. Typically, during the time of actual construction, they require interest-only payments. Upon completion, the loan amount becomes due and the standard mortgage payments begin. When the house has its certificate of occupancy, the construction is considered complete.
The rates charged for a construction loan depend on the prime rates of that period. The contractor, the loan officer and the homeowner sit together and estimate the amount of money required at every stage. Thus the money can be drawn according to the rate it is needed at. You are charged interest only on the amount you have drawn, never on the whole sum.
The lender never lends you the complete cost of the project. The percentage the lender agrees to loan depends upon your qualifications and other factors. If the land is already owned by you, it is considered as equity upon the loan. The options and rates offered differ greatly if you aim to live in the house after construction as opposed to an investor who plans to sell the house as soon as it is completed.
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