New Home Builder? Construction Loans to Consider

For a new home builder, construction loans can help make a dream project a reality. There are many options available for a new home builder when considering how to best finance a construction project. 

Owner to Builder

The builder is the construction company actually doing the physical building of the property. The owner is the person moving into, or selling, the home.  One way to fund the finances is by allowing the builder to pay for the entire project. When the construction is completed, the owner can refinance and renegotiate the terms of the loan into his or her name. The owner then takes on the responsibility of the loan.

Construction to Permanent Loan

An owner can negotiate a short term loan to pay for the construction of a property that will turn into a long-term mortgage loan once the construction is completed. With this type of loan the owner is the borrower and can negotiate the terms of each of the two separate loan periods. In the construction period of the loan, the money from the lender will go to the builder. The borrower can negotiate how and when the builder receives the money. The borrower can decide if the builder must meet benchmarks before he or she can receive any more money. The borrower can also set a limit of the length of time that the builder has to complete construction. Once the construction period is over, the borrower then pays a monthly mortgage payment. The interest rate of this portion of the loan can be fixed or floated down. If it is fixed, it remains the same over the entire term of the loan. If it is floated-down, it can be lowered in response to the market, to a certain point.

Note Modification Construction Loan

Much like a construction to permanent loan, a note modification construction loan requires a borrower to negotiate a permanent loan at the time that he or she negotiates a construction loan. The difference between these two types of loans is that with a note modification loan, once the construction period is over, the terms of the loan for the permanent portion are modified. Although each portion of the loan has separate terms, this is still considered one loan with one closing. 

Two-Time Loan

This type of loan is actually two separate loans with two separate closings and two separate negotiations. When a borrower negotiates a construction loan, they do not need to also negotiate a permanent loan. The permanent loan can be negotiated when the borrower decides to take out a mortgage or move into the property. The terms of the second loan are completely independent from the terms of the first term. The two loans have nothing to do with one another. For each loan the borrower will need to pay processing fees, closing costs, title costs, and any other costs associated with negotiating a loan.