Q:

How do you get a construction loan?

A:

Quick Answer

To get a construction loan, approach a lender with detailed plans of the building, construction schedule and realistic budget, states Bankrate. The lender is also likely to ask for a greater down payment and charge higher interest rates, according to AnnaMaria Andriotis for The Wall Street Journal.

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Full Answer

As the risk of lending for new construction is higher, banks charge a higher interest rate for these short-term loans. These loans can be converted into a long-term mortgage once the construction of the building is complete. As the appraisal value of the building is likely to be lower than the construction cost, the down payment is also greater. Typically, lenders expect borrowers to pay only the interest rate on the construction value, according to Andriotis.

The payment for the loan is disbursed according to the furnished construction schedule after the bank or lender sends someone to inspect the progress of construction. Lenders can also charge a 1 percent origination fee and impose a penalty for prepayment or refinance of the loan to another lender. Construction loans enable upmarket home buyers to acquire their dream homes more easily as they can purchase the land and ask for financing to complete the construction, explains Andriotis.

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