A construction mortgage, also known as a construction loan, is a short-term loan used to finance the building of a home or other real estate project. Unlike a traditional mortgage, which is used to purchase a completed property, a construction mortgage covers the costs of construction, including materials, labor, and permits, and is typically disbursed in stages as the project progresses.

Key Features of a Construction Mortgage:

1. Short-Term Duration: Construction loans usually last 6 to 18 months, covering the building phase. After completion, the loan is often converted into a standard mortgage or paid off.
2. Draw Schedule: Funds are released in installments, or “draws,” at specific milestones (e.g., foundation, framing, completion). Lenders may inspect the site before releasing each draw.
3. Higher Interest Rates: These loans often have higher interest rates than traditional mortgages due to the increased risk for lenders, as the property is not yet complete.
4. Interest-Only Payments: During construction, borrowers typically pay only the interest on the amount drawn, keeping payments lower until the project is finished.
5. Conversion to Permanent Mortgage: Many construction loans are “construction-to-permanent,” meaning they automatically convert to a standard mortgage once the home is completed, avoiding the need for a separate loan application.

Types of Construction Mortgages:

• Construction-to-Permanent Loan: Combines the construction loan and permanent mortgage into one loan, with one set of closing costs.
• Construction-Only Loan: Covers only the construction phase, requiring the borrower to secure a separate mortgage or pay off the loan upon completion.
• Renovation Loan: A variation used for major home renovations rather than new construction.

Who Uses Construction Mortgages?

• Homeowners building a custom home.
• Developers constructing residential or commercial properties.
• Borrowers renovating or expanding an existing property.

Requirements:

• Detailed Plans: Lenders require construction plans, budgets, and timelines.
• Qualified Builder: A licensed contractor is often required.
• Down Payment: Typically, 30-35% of the project cost, higher than standard mortgages.
• Good Credit: Strong credit scores and financial stability are crucial due to the loan’s risk.

Pros and Cons:

Pros:

• Funds construction in stages, reducing financial strain.
• Flexible for custom builds or unique projects.
• Can transition to a permanent mortgage seamlessly.

Con:

• Higher interest rates and fees.
• Complex approval process with strict oversight.
• Risk of cost overruns or delays affecting loan terms.

If you need more details or have a specific scenario (e.g., eligibility, lenders, or costs), contact Manny Johar anytime.