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Basics of Construction Loan

Construction loans (also known as housing construction loans in the United States and self-built mortgages in the United Kingdom) are any value-added loans in which proceeds are used for some form of construction financing. However, in the U.S. financial services industry, construction loans are a more special type of loan designed specifically for construction and have characteristics such as interest reserves, where the ability to repay may be based only on when the project is completed . Therefore, the defining characteristics of these loans are special monitoring and guidelines above the normal loan guidelines to ensure that the project is completed so that repayments can begin.

Almost all lenders are worried that their loans will be paid off, so underwriting construction loans usually focuses on this situation.

In the most basic case, that is, an individual who builds a house for himself, an enterprise who builds property for commercial use, or an investor who builds a property for rent, the basic criterion is to let the lender imagine that once the loan has been fully repaid. Expansion and conversion to ordinary mortgages, and whether individuals, businesses or investors can afford to repay the loan each month. Personally, if the lender tries to predict whether the individual can pay the monthly payment for the loan that will occur once the person moves into the house, the lender will primarily check the amount of income the individual has received. In terms of business, a similar analysis will be conducted. If an investor builds a rental property, a special evaluation will be ordered to try to predict how much the rent will be and whether it will be sufficient to repay the loan, plus all expenses, and still provide a certain minimum amount of income to the lessor. The key point here is that no matter how valuable the building is once built, few lenders will provide loans that exceed the capacity of the occupants, because even if they do not have to pay during the construction period, they must complete the monthly repayment once they can’t. Ensure that the owner will pay enough loans to make the monthly repayment affordable after the project is completed.

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