What Is Involved in a New Constructions Loan
Loans for new constructions are financing options, which are specifically for the costs that are associated with a new building job. Construction loans can be granted for commercial and residential projects, although there are some lenders who only deal with one kind. The construction loan terms and repayment plan can be different from other standard loans, and are extremely attractive to people planning a building project.
For residential new constructions, there can be an agreement in place and only the interest will be paid off during the construction phase. This helps those that are still paying for living expenses elsewhere, which makes it easier for them to get their project completed. Once their construction project is finished, the balance will be transferred to a more standard loan, like a mortgage. Such loans could be set out in a way that the transition will flow seamlessly and will only come with one closing charge.
Like every other kind of secured loan, a lender does want a guarantee for the value of the loan. For private loans that could mean the lender will expect the builder to finance a large portion of the cost themselves, similar to a down payment for a standard home purchase. A lender could provide better interest rates, all depending on the amount of money the builder is able to put up themselves.
However, commercial new construction loans will call for different kinds of tests in order to determine how safe the investment project is for a lender. These relate purely to profitability. There are several different kinds of formulas that a lender can use to determine which are safe investments. Most will involve a specific projected profit margin amount. While these formulas are helpful, they do not stand as guarantees that a profit will be gained. Which is why many lenders only agree to lend 80% of a project.
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