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Compare Construction Loans

Construction loan terms have many variables. Be sure you know what they are.

Residential Construction Lenders

All construction loans are not alike.

Many builders require customers to obtain their own construction loan. This passes the expense and credit risk during construction to the customer and allows the builder to charge a lower price for the house. The customer will usually apply for a construction/perm loan with a primary lender such as a bank or credit union. The builder may recommend a lender but construction loans should always be shopped. Some builders will only work with certain lenders but that might not be in your best interest. Some builders may have their own mortgage company and may offer what may seem like special deals. At the very least you should compare the loan terms and costs at three construction lenders.

Mortgage brokers do not have construction loan funds and will pass the loan to a primary lender such as a bank or credit union. The borrower is typically better off finding the construction lender themselves so that costs and terms of the actual construction loan can be compared.

Construction Loan Variables

1. Loan to value (LTV) Value is based on a projected appraisal of a completed home. The appraisal will consider land value and cost to build and compare values with sales prices at similar properties. Usually the construction loan to value is 70%-80% of appraised value, not to exceed 100% of hard costs. Each lender has its own LTV guidelines. Look for the lender with the highest LTV ratio. You can always reduce the loan amount at the end of construction.

2. Disbursement at closing. This is the maximum amount of money the lender will disburse to the builder at the construction loan closing. Actual amount may vary depending on the borrower's deposit amount paid to the builder and each lender has its own policy.

3. Finance of interest during construction. Some lenders will allow this but appraised value has to support the loan amount with the interest added in. This is a nice feature that will help your cash flow during construction.

4. Cost of Construction Loan Inspections. Generally there are six construction loan inspections and the fees charged for each of these inspections vary. Sometimes a builder will request an inspection too early and the borrower will be charged for a re inspection fee. Fees vary among lenders so make this part of your check list.

5. Construction Loan Administration Fee Some lenders charge a construction loan fee in addition to the construction loan inspection fees. Make this another item for your checklist.

6. Lenders charge a variety of construction loans fees that can be substantial. Such fees include a modification fee, discount points, origination fees and lock in fees plus normal mortgage loan fees. There are also many variables such as the interest rate during construction, when the interest rate changes, the construction interest rate index used, fixed rate versus adjustable rate during construction, to mention a few.

Residential Construction Lenders