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Construction Loan Mortgages Based on the Future Value of Property
Staff - Mortgage Lenders Plus.com
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There are a few of versions of the construction loan mortgage. The first is a mortgage for a project that includes purchase of a lot and construction of a house. The second is a home improvement project; that loan would typically be a home equity loan or “second mortgage.” The third would be the purchase of an existing home with the intention of conducting a major remodel. One of the primary features of a construction loan mortgage is that it will not only provide enough to purchase the existing property but also enough money to make the payments during construction and all the ancillary work to be done. Construction loan mortgages are based on the future value of the property – its market appraisal once the improvements are completed. Loan to cost ratios can be as high as 95%; your down payment need not be a deal-breaker. Loan to cost ratios include all costs associated with • Lot or existing property purchase
• Preliminary costs such as architectural plans, permits fees etc. • Hard cost of construction – which includes all actual costs associated with the construction labor and materials. • Closing costs, such as loan fees, title fees, real estate taxes, per diem interest and agent or lender’s fees. • Interest reserve, which is the reserve account that will make the payments on the construction loan during construction. • Contingency reserve, which is the reserve account that will pay of the unexpected cost overruns. One of the things that makes a construction loan mortgage a little more in line with your reality is the fact that, unlike a standard mortgage, loan closing expenses are considered as a cost and are inclusive of the loan amount calculation. The loan is also designed to pay for itself while the construction is ongoing. Because construction loan mortgages are not collateralized in the usual sense – by a structure with an established appraised value equivalent to the loan’s value – the interest rates are going to be a little higher than with a standard mortgage. A second mortgage that functions as a construction mortgage may be collateralized by your existing home equity, and that will help to temper the interest rate. It is important to shop for your construction loan mortgage as a home owner rather than a contractor. Your loan is for adding value to your home, not to provide funds for a spec project. Many contractors who take out uncollateralized construction loans are given funds from the loan on a piecemeal basis: once a certain stage is completed, the lender provides money for the next stage. That kind of scheduling invites sleepless nights and on-the-job tension that no homeowner should be subject to.
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