CONSTRUCTION LOANS

A construction loan is a type of financing designed specifically to fund the construction or renovation of a building or infrastructure project.

Here are key features of construction loans:

Short-Term Nature:

Construction loans are typically short-term loans, often with a duration of one year or less. Once the construction is complete, the borrower usually replaces the construction loan with a long-term mortgage.

Disbursement in Stages:

Rather than providing a lump sum upfront, construction loans disburse funds in stages or "draws" as the construction project reaches specific milestones. This ensures that the funds are used for their intended purpose and that the project is progressing as planned.

Loan-to-Value (LTV) Ratio:

Lenders often establish a loan-to-value ratio, which compares the loan amount to the appraised value of the completed property. This ratio influences the amount a borrower can borrow.

Approval Process:

The approval process for construction loans is more involved than that of traditional home loans. Lenders may require detailed project plans, budgets, consents and timelines. The borrower's creditworthiness and ability to complete the project are critical factors in the approval process.

Interest Rates:

Construction loan interest rates may be higher than those for traditional mortgages due to the increased risk associated with the construction process. Rates are usually on a variable based and then can move to a fixed rate if desired once the project is complete.