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
Administering loans between the time of disbursement and the time the loan is fully paid off. Servicing includes collecting payments from the borrower, maintaining payment records, ...
Charging unwary borrowers interest rates and/or fees that are excessive relative to what the same borrowers could have found had they shopped the market. ...
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The monthly mortgage payment which, if maintained unchanged through the remaining life of the loan at the then-existing interest rate, will pay off the loan at term. ...
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 ...
One of many interest rate indexes used to determine interest rate adjustments on an adjustable rate mortgage. ...
The maximum allowable increase in the interest rate on an ARM each time the rate is adjusted. It is usually one or two percentage points. ...
The ratio of total housing expense to borrower income. This ratio is used (along with other factors) in qualifying borrowers. ...
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