Construction loans are usually shorter than standard home mortgages and are attractive to lenders because of the quick and high return on their investment and the fact that they are able to monitor the disbursement of funds as construction progresses. A construction loan is short-term to cover the cost of building. It is sometimes referred to as "interim." These loans differ from other mortgages in that they are funded through periodic advances as construction progresses. The loan may be funded using two different methods: 1) after certain stages of building are completed or 2) after certain time periods, such as each month, for work completed up to that point.
It takes an experienced loan officer to ensure that borrowed funds are released as building progresses. This way, the value of the building as collateral increases at the same rate as the amount borrowed. The risk of construction loans are in the ability of the borrower or builder to complete the project within the allotted budget, which is the total amount of money borrowed to do so. If the builder or borrower fails to complete the project, then the construction loan becomes the main amount for repayment. Ordinarily, once the project has been completed, the borrower would mortgage the property for standard lending.
The construction industry is a major employer in the United States and much of it relies heavily on the availability of lending. The funds can be used to build a house, an office building, or a shopping center. These construction loans vary greatly in size, but the risks are similar. All are secured by a mortgage on the land and the building to be constructed. All are funded in stages, and most all require a separate, permanent borrowing commitment to assure repayment immediately upon completion of the project.
As far as the lender is concerned, the goal of successful lending for building is to complete the project within the money allocated, all bills paid, and no liens filed. The construction loan can then be repaid through funding of a permanent amount or the sale of the property. The borrower is mainly the one concerned with building according to plans and specifications, but the lender also has an interest. Failure to meet those plans and specifications can be a cause for refusal by the permanent lender to release the amount for payoff. It is advised that any builder or individual who wishes to apply for any construction loans, do so with caution and preparation, but also in prayer. "Except the LORD build the house, they labour in vain that build it" (Psalm 127:1). There is little point in building anything if it isn't part of God's will.
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