Chinese (Simplified)EnglishGermanSpanish

Construction Loan Programs: The 3 Key Benefits to Consider

Feb 15, 2021 | Blog, Uncategorised

The purpose of a construction loan is to finance the building of a new residential real estate property. The projected market value of the subject property is used to secure the lending and the loan proceeds are distributed by the Lender via separate “draws”. Generally, once a certain phase of the construction works is finished, the Borrower is entitled for a “draw”. Installments are paid out periodically, after each stage of the project is found to be completed.

Therefore, prior to approving a given loan application, Lenders will request to see a detailed timetable and an estimated budget of the construction project signed by both: the applicant and the general contractor involved. It is very important that the Borrower keeps a detailed record of the paid expenses during each phase of the construction works or else the costs might not be reimbursed by the Lender. Organized bookkeeping should be in place to avoid delays of “draws” and all of the project’s expenses should be presented to the Lender. The payee list should include: date paid, name of supplier or sub-contractor, amount of payment, method of payment, payee address. The below items are some of the accepted expenses verification documents:

  • Receipts for paid supplies and materials
  • Receipts for paid labor costs – construction personnel wages
  • Copy of cancelled checks

Also, before “refunding” the costs, the Lender will schedule inspections to verify the job is well done and that all of the listed materials were actually used in the construction works.

After the building is finished, the Borrower can apply for a traditional mortgage loan and repay the short-term obligation. If there are any unexpected delays with the project or additional expenses occur, the Borrower has the option to apply for a Bridge loan.

Qualifying and applying for a construction loan is not very easy, FICO shall be 680 or higher. If the Borrower chooses the discussed loan program, s/he will be rewarded in the following ways:

1 Reduced Costs: Building a house on your own can be cheaper than buying an existing property. Construction costs can be reduced with up to 40%, especially, if you already own a piece of land. The minimum loan amount is set at $75,000 and its maximum is $650,000.

2 Low Monthly Payments: Construction loan is an interest only borrowing thus the Borrower’s monthly payments will be low.

Additionally, interest is accumulated only on the distributed “draws”. It starts at 4.99% with a monthly increase of 0.5%, cap is set at 8.99%. The minimum down payment requested by Lenders is 20% and the value of the land (if owned) is used as equity.

3 No prepayment penalties applicable: Construction loan term is usually 12 months (possible 4 months extension upon request) but the obligation can be paid back at any time before its maturity date. The short- term nature of the loan eliminates the application of prepayment penalty and gives the Borrower flexibility.

Have More Questions About This Article? Feel Free to Contact Us.

11 + 13 =

Covid-19 and Commercial Loans Trends 2021

What is the biggest challenge you anticipate in 2021 as a direct lender or financial intermediary in commercial real estate? In 2021 it will be challenging to meet the business needs of Borrowers using hotel/restaurant properties as collateral to secure their loan. In...

Small is Beautiful: The Revival of US Rural Areas

Year of 2020 was no like other. It looks like the Covid-19 pandemic sent the crowded urban life style preferred by many bohemians and younger professionals in the past as new migration trends are identified by moving companies. BTW: Moving industry is the one sector...

10 Common Pitfalls to Avoid in the Fix-and-Flip Process

Fix-and-Flip projects are generally seen as promising business opportunities that can generate quick cash profit and good return-on-investment (ROI). An entrepreneur may need to completely transform a property or simply do some tender renovations before the building...

Real Estate Investment Strategies: Fix-and-Flip or Buy-and-Hold

Many real estate entrepreneurs are purchasing properties with the idea of receiving good return on investment for their cash and increasing their wealth. A business person can choose to implement both the Fix-and-Flip or Buy-and-Hold strategy and the decision depends...

Our Success Story: 130 Coolwater Lane, Barstow, CA 92311

Universal Commercial Capital (UCC) focus is on finding the right financial solutions for customers that may experience issues with obtaining a business purpose loan from lending institutions as banks. Our team is dedicated on assisting each and every Borrower receives...

The Beginner’s Guide to Private Lending: 5 Important Steps

Private lenders are usually higher income individuals with available cash that are looking for opportunities to increase their capital by receiving a good return on investment through collecting interest on loans secured by real estate assets. Nowadays, banks cannot...