Finding the right Contruction Financing
Financing a construction project is different from financing the purchase of a home, and finding the right construction financing requires a different approach.
Unless you are building a multi-million-dollar shopping mall or similar commercial project, construction lending is invariably done through a local bank. This is an outgrowth of the bank's necessarily close involvement with the project and the parties concerned. The bank will want to know how its money is spent and whether the finished project will be worth enough to make the bank's security interest worthwhile.
The first job of the borrower is to provide the lender with complete documentation of the project. This includes plans and specifications and any permits needed to get the project built. The more complete and detailed the documentation, the easier the loan approval process will be.
The lender will also require a complete budget for the project and this is typically prepared by the contractor. The budget should mirror the terms of the construction contract negotiated by the contractor and homeowner. The lender will not only review the contract and budget to determine if it will be satisfied with the finished product, but will analyze it to see how payments will be made as construction progresses.
Disbursements under the construction loan are made in stages, with an initial payment to get work started and subsequent payments made as portions of the job are completed. At each stage, the lender's representative will evaluate the project's progress before releasing funds.
Two options are typically available when the project is complete. Some loans convert automatically to permanent financing on terms negotiated when the construction financing was first arranged. Others do not convert automatically and require a completely new mortgage.
Interest rates are less important in construction financing than in permanent financing, since the construction loan should be relatively short term and interest is charged only on sums actually advanced. Important factors to consider in comparing loans are the terms of any automatic conversion, the ease of dealing with the lender in view of the complexity of the construction process, and how flexible the lender is willing to be with loan amounts, deadlines and changes in the midst of the project.