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
Wondering who is this Fannie Mae person that your real estate agent always mentions when the subject about mortgage is brought up? Fannie Mae is not a person, nor a Woody Allen female ...
A particular combination of loan, borrower, property, and transaction characteristics that lenders use in setting prices and underwriting requirements. ...
Fees collected by a loan officer from a borrower that are lower than the target fees specified by the lender or mortgage broker who employs the loan officer. An underage is the opposite ...
Mortgages typically amortize over time through fixed value installment payments. However, there's a type of mortgage that doesn't: the Balloon Mortgage. It's called this way because, with ...
The house in which the borrower will live most of the time, as distinct from a second home or an investor property that will be rented. ...
Loan applications that are withdrawn by borrowers, because they have found a better deal or for other reasons. ...
Rates and points quoted by loan providers. You cannot safely assume that mortgage price quotes are always timely, niche-adjusted, complete, or reliable. Timeliness: Most mortgage lenders ...
A lender commitment to make a mortgage loan to a specified borrower, prior to the identification of the property that will be mortgaged. On a pre-approval, unlike a pre-qualification, the ...
An option exercised by the borrower, at the time of the loan application or later, to 'lock in' the rates and points prevailing in the market at that time. When lenders 'lock/' they ...
Have a question or comment?
We're here to help.