A construction loan (also called home construction loan in the United States and self-sustaining mortgage building in the UK) is a value added loan in which the proceeds are used to finance development of several types. However, in the US Financial Services industry, construction loans are a more specific type of loan, which is designed for construction and contains features such as interest reserves, where the ability to pay can be based on something that can only happen when a project is built. Thus, the decisive features of this loan are special monitoring and guidance above the normal loan guidelines to ensure that the project is completed so that payments can begin.
Video Construction loan
Penjaminan kredit
Almost all lenders worry that their money is lent, so underwriting construction loans usually focus on how it can happen.
In the most basic situations, ie individuals who build homes for themselves, businesses that build properties for business use, or build property investors for rent, the fundamental guidelines are for the lender to imagine once the loan has been fully extended and converted into a normal mortgage and the occupied building , whether individual, business, or investor can repay the loan every month. In the case of individuals, where lenders try to predict whether an individual can pay for each month of loan payments that will occur after the person moves home, the lender will primarily look at the amount of income received by the individual. In the case of business, a similar analysis will occur. In the case of an investor building rental property, a special assessment will be ordered that will try to predict what will be the lease and whether they will be enough to repay the loan, plus all the fees and still provide the lessee a certain minimum amount of income. The key here is that no matter how valuable the building may be once completed, almost no lender will extend the loan for more than what the invaders can afford, because although they do not need to make payments during construction they should make monthly payments once it is done and not there is a guarantee that the owner will pay the loan enough to make affordable monthly payments once the project is completed.
Beyond these guidelines, the next most common rule is the minimum cash purchase requirement. Even if, for example, a business may be able to afford the monthly payment of a loan high enough to pay for the entire construction project, many lenders will require them to use a certain minimum amount of their own cash to complete the project. The reason for this is both to psychologically and economically bind the owner to the project (hopefully making it less likely that they will walk away from the project if things go wrong), and give the lender a pillow where in case of error they are more likely to be able to sell real estate with a value that would better cover the loan amount. These guidelines are often called "loan to cost" terms, ie the lender will only borrow up to 85% of the project cost.
The last major guide is the maximum loan amount the lender will allow relative to the value of the completed project. This rule is designed to help ensure that, once the project is completed, if the borrower stops paying the payment, the lender can sell the property and easily close all the funds lent.
Construction Credits are often extended to developers who want to build something but soon sell it after building it. In this case, a special assessment is ordered to try to predict the value of future project sales. The first guideline above, affordability, is usually not used because the owner will immediately try to sell the property. However, it is sometimes used as an example when a developer builds condominia, the lender may evaluate whether the project is changing from condom to apartment if the rental price received will more than pay the loan each month. The need for cash injection is often higher because of the additional risk (an urgent need to sell). However, lending to value requirements is often the most impactful. This is because its value is often calculated differently then how one might assume. For example, if the developer builds a 20-unit condominium project, the lender may not only borrow a certain percentage of the total predicted total value in the future, but only a certain percentage of the condominium project value if, due to emergencies or unexpected, all buildings must be sold at once to one buyer (known as bulk sales). Since the selling price that can be realized in this case may be much lower, the maximum loan that will be given by many lenders will be much lower.
Maps Construction loan
Ordinary settings
Funds are taken from loans through a process called "lottery". A draw is a method by which funds are drawn from the construction budget to pay for material suppliers and contractors. Each lender has different requirements to process the sweepstakes. For example, some allow borrowers to request withdrawals online, while others require periodic documents and inspections. This process helps ensure that the loan proceeds are actually used for construction and the construction process runs smoothly. The borrower only bears interest on the amount borrowed at one point.
Instead of paying every month during construction, almost all construction loans in the United States have additional funds borrowed directly and kept in locked accounts known as "interest reserves". Every month a monthly payment is taken from the account so the borrower does not have to pay from the pocket until the project is completed.
In Australia, withdrawal of progress is only attractive to minimize expenditures for borrowers. After construction has been completed, the loan returns to the requested payment option, the borrower selected under the underwriting (either interest only or principal and interest).
Construction Management
In addition to the underwriting guidelines described above, most lenders seek to reduce their risk in various ways. The first involves due diligence on general contractors, architects, lands on which property will be built, environmental inspections, and assessments. Then, while the construction process is underway, the lenders carefully check the progress well to ensure construction goes well, as well as to ensure that all workers are paid so that loan security by real estate is not violated by the mechanics. lien.
References
Source of the article : Wikipedia
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