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Florida Construction Loans

By Colleen Colkitt

What Is A Construction Loan?

A construction loan is an essential part of the home remodeling and rebuilding process. A home construction loan goes towards financing parts of the construction of any kind, for your home. Though there are mortgage loans and first time homebuyer loans. The construction loan is typically geared toward those who already have their finances in order and have the property secured.

The purposes for the construction loan include remodeling an existing property, secondary residence renovation, and also for investment purposes. Sometimes investors buy foreclosed properties, typically at a discounted price, and fix them up so they become livable again. This would be the time for a construction loan. Usually an appraiser from the bank would come and evaluate the construction plans, and then draft up and budget for materials, equipment and labor.

The construction loan allows the owner to cover costs associated with repairs or renovations. The construction project must be completed before repayments on the loan can occur. An underwriter assists in the negotiations of the loan's terms and conditions. This will include payment plans or sometimes interest reserves.

One-Time Close

This type of loan is common because it's a simple way to get a loan to build your home. Generally, there is a maximum of a 12-month construction term, with possible penalties for going over. This involves a one-time, or single close, and a single rate for the construction term and the end of financing.

After the loan is scheduled, either make regular mortgage payments or pay interest on the money that was disbursed to the lender, according to the terms of your loan. Sometimes certain actions on the construction list must be completed before funds can be released to the builder. A draw schedule, in contrast, directs certain projects to be done in an order according to when needed materials are available.

Once the rate is decided and the construction is completed, the year it took to do the renovations will be factored into the loan term, and it will convert to a 29 year mortgage.

Two-Time Close

With a two-time close construction loan, there are costs for two closings. The first cost is at the start of the construction. The second is to refinance the loan into a permanent mortgage. Once you close the loan, you can start making interest payments towards the lender. These payments will increase as construction continues over time.

After construction is completed, you must refinance the loan into a permanent mortgage, which is the second close you will make. Since this is a more flexible loan, you can typically get a lower rate on the permanent mortgage, and you won't be locked into an end loan cost.

Note Modification

The note modification loan is similar to the one-time close loan. It differs from the on-time close because often times, with the note modification loan there are two separate rates. The first covers the term for construction, and the second rate refers to the end loan payment. During the construction term, the rate is usually fixed, but you will be asked to pay interest on the amount disbursed during this time.

Make sure to allow enough time for your house to be completed, and maybe plan for delays as well. This will give you time to secure a fixed rate for the duration of the construction, and then you can "modify" or convert your construction loan into a mortgage.

Costs associated with the modification are to set up escrow accounts and to make payments on outstanding interest fees that may have accumulated during the renovation period.

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