Construction Financing
Definition of "Construction Financing"
The method of financing used when a borrower contracts to have a house built, as opposed to purchasing a completed house. Construction can be financed in two ways. One way is to use two loans, a construction loan for the period of construction, followed by a permanent loan from another lender, which pays off the construction loan. Borrowers who use two loans must decide whether they will take out the construction loan, or have the builder do it. The second approach is to use a single combination loan, where the construction loan becomes permanent at the end of the construction period. Some lenders (primarily commercial banks) will only make construction loans. Others will only make combination loans. And some will do it either way. Two Loans Versus One Loan: Two loans mean that you shop twice and incur two sets of closing costs. One loan means that you shop only once and incur only one set of closing costs. But, to do it effectively, you must shop construction loans and permanent loans at the same time. Construction loans usually run for six months to a year and carry an adjustable interest rate that resets monthly or quarterly. In addition to points and closing costs, lenders charge a construction fee to cover their costs in administering the loan. (Construction lenders pay out the loan in stages and must monitor the progress of construction). In shopping construction loans, one must take account of all of these dimensions of the 'price.' Lenders offering combination loans typically will credit some of the fees paid for the construction loan toward the permanent loan. The lender might charge four points for the construction loan, for example, but apply three of the points toward the permanent loan. If the borrower takes the permanent loan from another lender, however, the construction lender retains the three points. This credit plus the one set of closing costs are major talking points of loan officers pushing combination loans.
Popular Mortgage Terms
The federal law that specifies the information that must be provided to borrowers on different types of loans. Also, the form used to disclose this information. Truth in Lending (TIL) is ...
A mortgage loan for 125% of property value. Since such loans are only partly secured, they have many of the characteristics of unsecured loans, including relatively high interest rates. ...
A second mortgage on a property that is not paid off when the first mortgage is refinanced. The second mortgage lender must allow subordination of the second to the new first mortgage. ...
Same as term Qualification: The process of determining whether a prospective borrower has the ability to repay a loan. ...
The definition of an assumable mortgage is what happens when a buyer assumes or takes over a mortgage that the seller contracted. This is a type of financial arrangement that passes an ...
An agreement by the lender not to exercise the legal right to foreclose in exchange for an agreement by the borrower to a payment plan that will cure the borrowers delinquency. ...
A particular combination of loan, borrower, property, and transaction characteristics that lenders use in setting prices and underwriting requirements. ...
The assumption that the index value to which the interest rate on an ARM is tied follows the same pattern as in some prior historical period. In meeting their disclosure obligations in ...
A measure of interest cost on a reverse mortgage. ...
Have a question or comment?
We're here to help.