What is a Construction Loan?
Construction mortgages, also known as construction loans, are short-term loans specifically designed to finance the construction of a new home or building. They are different from traditional mortgages in that they provide funding for the building process, rather than for the purchase of an existing property. Construction loans are typically used by individuals or businesses who want to build a new home or commercial building from scratch. They can also be used to finance major renovations or additions to an existing property.
When it comes to construction mortgages, it's important to understand that you typically need to already own the land where the construction will take place. The lender will then finance up to 65% of the total project cost, rather than the "as complete" market value of the property. This means that even though the land is already paid for, it is still considered part of the overall project cost.
For example, let's say you own a piece of land that is worth $100,000, and the total cost of the construction project is $200,000. In this case, the lender would finance up to 65% of the $300,000 project cost, which is $195,000.
It's also worth noting that construction mortgages usually require you to have significant liquid savings to manage the cash flow of the project.
Interested? Next steps:
Talk to me to discuss your options and determine your eligibility for a construction mortgage.
Obtain a Letter of Intent from a lender, which is a document that states the lender's willingness to finance your construction project.
Order "as is" and "as complete" appraisals. The "as is" appraisal is an estimate of the value of the land as it currently stands, while the "as complete" appraisal is an estimate of the value of the property once construction is complete.
Complete a full mortgage application, which will require you to provide detailed information about your project, including the construction timeline, budget, and plans.
