Are you thinking about building your new home or office from the ground up? If so, then you should be prepared for a different application process than that of a traditional mortgage or loan. When securing the finances for an upcoming building project, you must apply for a construction loan, which can be a long and confusing process. In order to help you better understand construction loans, the experts at Clover Mortgage have put together this brief introduction.
Construction financing is a high-interest, short-term loan used to finance the construction costs of property building projects. There are two main types of construction financing currently used to fund real-estate construction.
A completion mortgage doesn’t require the borrower to pay the lender until construction is complete and they have access to the finished property.
With this option, you are not required to make any payments until you are given possession of the newly built property. Similarly, if you would like to upgrade or change the terms of your mortgage you are free to do so until 30 days before you gain access. On the other hand, if your financial situation changes for the worst during the building period, it could jeopardize your mortgage approval. It is best to avoid making any major financial decisions while you are waiting to receive the funding for your completion mortgage.
A draw mortgage gives the borrower access to parts of the loan amount in increments throughout the building process. The first portion is optional when the project is 15% done. The second portion of the loan is given when the property if approximate around 40% complete. The third portion is given when the property is approximately 65% complete, and the fourth portion of the funds are provided when the property is approximately 85% complet. The final amount is funded once the project is finalized.
This option is beneficial because it allows the borrower to finance the construction upfront without having to worry about how to fund the building process. It also helps the builder stay on track because they must pass inspections before receiving each of the subsequent payments. This type of mortgage can be more expensive in the long run because the borrower must cover the cost of each inspection. You begin procuring interest on your loan as soon as you receive your first payment. You also don’t have the option to upgrade or change your loan terms once you accept your first payment.
Construction financing can be used by either individuals or companies to fund multiple different types of projects. Below are several common uses:
Whether you are looking to build a small family home, a townhouse or a big commercial building, the experienced, knowledgeable, and trusted construction mortgage agents at Clover Mortgage can help get you started today.
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