Home buyers, home builders, or businesses that finance a home or building as it is being built use construction loans. Colorado home buyers and builders seeking a construction loan generally look to local credit unions or regional banks, as they can respond to building trends with more confidence than financial institutions not of the area the loan originates. A construction loan is a short-term loan used to cover the costs of the building project before obtaining long-term funding.
There are two main kinds of construction loans: 1) construction-to-permanent: lender advances funds to pay for construction. After structure is built, the same lender rolls the loan balance into a standard mortgage. During construction, the borrower only pays interest on the loan amount under the construction-to-permanent model. The other type of construction loans in Colorado are 2) stand-alone construction: lender advances funds to pay for construction. Upon completion, a new loan, called an “end loan” or a permanent mortgage loan, is obtained to pay off the construction debt. Under the stand-alone model two closings are required; one for the construction loan and one for the mortgage.
Qualifying for a construction loan may be more difficult because the lender doesn’t have the collateral of a completed structure as with a traditional mortgage. Because construction loans are considered riskier than conventional loans, the interest rates are usually higher. Most lenders require, at a minimum, a 20% down payment on your Colorado construction loans. This is called the minimum cash injection requirement. This ties the borrower to the loan financially and psychologically, making it harder for them to walk away from the project if there are problems. Also required for a construction loan is a “blue book,” a comprehensive list of construction details about the project, and a proven and qualified builder.
Funds are taken from the loan through a process called a “draw”. A draw is taken to pay material suppliers and contractors throughout the building process. Lenders may have different requirements for processing a draw on your Colorado construction loans. For example, one may request for draws be made online, where another may require paperwork or inspections be done of the job site to ensure funds are being used as intended, the project is on schedule, and workers are being paid so the security of the loan by the real estate is not violated by a mechanics lien.
For more information about construction loans or other types of home loans, please call or email Integrity First Financial at (719) 385-0777 office, (719) 360-3767 mobile, or contact Vic, the owner, directly at email@example.com to discuss construction loans in Colorado.