The U.S. construction industry was strongly hit by the recession. However, the industry is steadily returning with more than 650,000 employers and over 6 million employees. However, one of the major challenges faced by businesses in the industry is access to funding. In addition to finding answers to questions like “Can I be my own registered agent?” construction loans interest rate and other such factors have seemingly hindered several entrepreneurs from expanding.
A construction loan is a bank-issued short-term financing specifically created for the purpose of financing a new home or other real estate project.
Things to know about construction loans
High interest rate: Construction loans tend to come with high-interest rates due to the risk involved.
Big Down Payment: Construction loans generally require a large down payment of between 20 and 25% of the cost of construction and mortgage.
Thorough application process: Applying for a construction loan can be time-consuming and stressful as it requires providing the details of the project, including like the total amount of funding required, details about the builder, a detailed project timeline, the floor plans or construction drawings, the cost of materials, and the cost of labor.
Types of construction loans
There are several types of construction loans as follows:
Construction Mortgage Loans: This is a loan granted to finance the purchase of land, or construction of a home. These loans are usually structured so that the lender pays a percentage of the completion costs and the borrower, the builder or developer, pays the rest.
Construction-to-Permanent Loans: Also known as the CPloan, construction-to-permanent loans are another financing option for the construction of a new home. Such loans offer some extra convenience to borrowers with the combination of two types of loans in a single process.
Commercial Construction Loans: These loans are for bigger projects such as multi-family home or apartment building, high-rise, multi-unit retail center, or commercial office building.