Overview of The Construction Loan

The typical construction loan will contain elements with different characteristics than found in a standard purchase or refinance loan. Four items are of particular importance: loan commitment, rate lock, method of disbursement, and lower LTV ratio limits.

Upon approval of the construction loan application, the borrower will receive a loan commitment from the lender. Most lenders do levy a loan commitment fee for construction loans. This loan commitment normally lasts for nine (9) months, though longer or shorter commitments are also used.

The interest rate is locked in for the entire term of the construction loan. Remember, however, that construction loan itself is short-term. The rate lock is primarily for the permanent refinancing loan at the conclusion of the construction. Four elements that require special clarifications include the following:

  • Developer vs. Contractor
  • Construction vs. Construction-Permanent
  • Staggered Disbursements
  • LTV Restrictions

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Real Estate 101

Real Estate 101

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