What Is a Construction Loan?

Construction loans offer short-term financing to

build primary homes, second home or investment

properties from the ground up. Borrowers can use

this type of loan to finance either construction only

or both the land purchase and the subsequent

construction project.

Types of Construction Financing

1. ALL-IN-ONE CONSTRUCTION LOAN (CONTRUCTION-TO-PERM LOAN)

The All-in-One Construction Loans are available for building owner occupied primary and/or

second homes with only one application and one closing. Initially it covers construction costs to

complete home and then transitions into permanent long-term traditional mortgage after

construction is completed

Your all in one closing construction loan include:

•

An initial loan disbursement to finance the purchase of the land to build on unless you

already own the property.

•

During the construction phase, underwriting schedules disbursements directly to your

builder and some suppliers over the course of the construction period, to cover construction

expenses.

•

Once the construction phase expires, the loan converts to a Eligibility Requirements for

Construction-to-Permanent Loans

•

Down Payment: You’ll generally need a down payment of 20% to 25% percent,

•

Income: Tax returns and self-employed using personal or business bank statements

•

Credit score: Minimum of 660 to 680.

•

Both fixed-rate and/or adjustable-rate mortgages are available.

Loan Amounts

•

Loan Amounts: $250,000 to $ 6,000,000

•

Loan to Value: From 75% to 95% LTV

Key Takeaways

A construction-to-perm loan finances the construction of a property and house, then converts

to a loan term conventional mortgage for thoses using tax return income or a non-QM

Mortgage those borrowers who utilize self-employment income on completion. Construction-

to-permanent loans only require one round of closing costs compared to double closing which

requires closing cost on the construction-only loan and closing costs on the permanent loan to

pay off construction-only loan.

ALL IN ONE CLOSING CONSTRUCTION-TO-PERM LOANS ARE RESERVED FOR BUILDING OWNER

OCCUPIED PRIMARY AND SECOND HOMES. REAL ESTATE INVESTOR REQUIRING A CONSTRUCTION

LOAN TO BUILD AND SELL AND/OR RENT THE COMPLETED PROJECT MUST USE A DOUBLE CLOSING

CONSTRUCTION LOAN.

2. DOUBLE CLOSING CONSTRUCTION LOAN

A double closing construction loan are two completely separate loans: The first loan is a short-

term construction loan. You will then need an additional loan to payoff the short-term

construction loan. During the construction phase, you will only be responsible for interest-only

payments, with monthly payment amounts increasing as funds are utilized. When you receive

notification that construction is almost completed. You will be required to show a loan

commitments letter or other source of funding to show that you can pay off the construction

loan.

Loan Amounts

•

Loan Amounts: $250,000 to $ 10,000,000

•

Loan to Value: Ask your Loan Officer

How Construction Loans Work

Construction financing is more complex than traditional financing for an existing property. Since

there’s no existing building to inspect, underwriting has to rely on detailed plans instead.

Borrowers who want to secure a construction loan either for an investment or a construction-

to-perm loan for a primary or second homes. Borrowers must develop a comprehensive plan

for there particular project.

These plans must include many things, a few of which are listed below:

•

Purchase offer / Contract to purchase ? Deed for the land to be built upon.

•

Complete set of blueprints generated by a licensed architect.

•

Investment Building or Home specifications.

•

Contract with a qualified builder to complete the project.

•

Comprehensive budget, including appliances, landscaping, upgrades, and a contingency

amount or reserve.

Construction draw schedules.

The construction draw schedule is a unique feature for both types of construction loans. The

borrower, contractor, and underwriting work together to create a draw schedule that specifies

when each chunk of financing will become due.

The loan only offers a limited sum of money upfront and provides subsequent payouts as you

meet key milestones in the project’s construction.

These payouts don’t go directly to the borrower. Instead, underwriting provides direct payments

to the builder and other professionals who are working on the construction. The first

construction draw typically funds the purchase of the property and initial expenses, including

permits.

Certain events will trigger the project’s subsequent construction draws, such as the following:

•

Set periods of time.

•

Completion of a particular construction phase.

•

Completion of a percentage of the total project.

To receive the final draw, the contractor must prove that the project has been completed with a

final inspection and certificate of occupancy or the equivalent.