Question:

How are construction loan lender terms different from residential mortgage terms?

Answer:

Construction loans and residential mortgages have a lot of differences. Construction loan lender terms specify short term duration, interim interest-only repayment and loans are due at the end of the construction phase. Unlike regular mortgages available for 10, 15 and up to 30 or 40 years, construction loans have a much shorter life span - 6 months to 2 years with most commonly 1 year term.

Construction Loan Lender Terms

When the building stage is completed, the construction loan lender requires that the construction loan is repaid. Some borrowers may have difficulties arranging permanent financing at the end of the construction phase. If the borrower locked in a single close construction to permanent loan, they are at the mercy of the lender unless they find alternative financing and come up with the cash for the construction loan.

Also, construction loan terms do not follow standardized rules. Rather, every case is client-specific and the arrangements may vary greatly. It is said that construction loan terms depend on the story of the borrower. Every borrower in need of such a loan does have a story - interrupted construction financing, building a custom house, etc. The land over which construction is taking place is often considered a collateral for the loan.

Naturally, because of the relative short life those loans have, borrowers have to be prepared to pay much higher rates on a construction loan compared to a long term mortgage.

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