Q:What is the definition of construction loan?
A:Construction loans are available for financing the construction of both residential and commercial properties. Depending on the purpose for which a builder requires funding construction loans can be broadly classified into two categories: commercial construction loans and residential construction loans.
Content:
1.Types of Construction Loans - Commercial
Acquisition and Development Loan: This loan is meant to cover the cost of purchasing land and the cost of horizontal improvements that are to be made on the land. Horizontal improvements refer to changes like leveling the land, building roads, building a sewer system, grading the land and so on. The lending institution does not provide the entire cost of acquiring and developing the land. The builder is generally expected to bear 25% of the cost of acquiring and developing the land.
Mini-Perm Loan: Mini-perm loans are generally used by the builder before he has access to permanent sources of financing. This is a short-term loan which is used by the builder to establish an operating history which in turn would help him access a long-term permanent loan.
Bridge Loan: A bridge loan as the name suggests helps to bridge the gap between applying for a long-term loan and the sanctioning of the same by the lending institution. Although, a bridge loan appears similar to a mini-perm loan, the difference is that mini-perm loans are provided by commercial banks, whereas bridge loans are granted by private lenders.
Take-Out Loan: This type of permanent loan can be best understood with the help of an example. Let us assume that a builder is provided a construction loan by a lender for the construction of a residential building. On completion of the project, the buyer of the house is provided a take-out loan by the lender. The builder who now assumes the role of a seller, sells the house/condominium to the buyer, who in turn pays for the house/condominium using the take-out loan. The builder/seller uses the money from the sale of the house/condominium to repay the construction loan. Read the rest of this entry »
