All you need to know about Construction Loan

Everyone knows about taking loan while buying a property but did you know that if you are constructing a property then there is a specific type of loan available to you known as construction loan. The construction loan is a debt designed specifically for those who are building a home rather than buying one. The amount on this loan is based upon the progress of the work done on the property. Instead of providing the whole amount of loan upfront, the lender bank will pay you progressive amounts based upon the degree of completion of the property.

These type of loan are not very popular as these are based more upon the trust factor and the builder’s reputation. The lender bank is actually giving money for something that is yet to be constructed and hence paperwork also involve good record of the builder. Banks have strict qualifying requirement for the builder as well. To eligible to take this loan, your builder must be a licensed general contractor with an established reputation in the market. The lending bank will also require good financial health of the borrower and also a good credit score to ensure repayment of loan.

As opposed to a normal home loan, this loan requires the exact plan for the house to the smallest detail. This detailed layout is often called as the blue book and it needs to be submitted to the lender bank at the time of applying for the loan. Then the bank goes through it and also may require you to make some changes. The details can be as specific as the ceiling heights to the type of home insulation.

Before applying for a construction loan you must do a detailed analysis of the amount that you will need to borrow from the lender bank and also do an appraisal of the value of house to be constructed. The calculations are often done by keeping a base of a similar house with similar features and the market rates for various amenities and fixtures. These loans also require a larger down payment as compared to other loans. Generally the amount of down payment is about 20% of the construction loan’s value. This is done by the lender bank to protect them from losses like house construction left in between or defaults. Hence while taking a construction loan you also require a good sum of money to be paid up front.

 

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Writer : Sugandh Ratan Agarwal

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