There are some unions that finance home buyers or those who want to build their homes, and this funding is referred to as construction loans, which is usually a short term loan. People who want to build investment projects cannot be allowed to access construction loans, but instead they should apply for permanent mortgage loans because construction loans are for people building their own homes. Construction loans are given for a period of one year to serve the beginning of a project before the home builder get other funding.
This loan has a wide range of benefits, but they are viewed as very risky hence lenders charge a higher interest rate than the usual rate for a normal loan. After completion of the building project the borrower is supposed to refinance the loan into a permanent mortgage loan or get a loan to service the construction loan. Some construction loans require you to pay interest only while the project is ongoing and clear the entire balance when the project is complete. Sometimes when the borrower needs the home built the lender might pay the contractor directly rather than giving the money to the owner. When the lender has to pay the contractor on behalf of the builder, the money is paid in installments as at various stages when the contractors need to be paid.
It is very impossible to get total funding to build a home of your dream, and for most money lenders you are required to provide between twenty to twenty-five percent of the total construction cost. In order to get this kind of loans, you must have an established good credit history or else it becomes very hard to get this kind of loans. For obvious reasons, the borrower has to submit comprehensive project details to the lender and also prove to him that the money will do its right work correctly to prevent losses. Construction loans are usually offered by local credit unions and regional banks because they are familiar with the builders and contractors of their region and therefore feel more comfortable when financing members of their community.
Construction loans are the most optimum loans for those who intend to put up their own homes as it has many advantages, as explained below. It is advantageous when the loan lender pays the contractor instead of giving the loan to the borrower because it prevents chances of it being diverted to any other uses. The time for payment of this loans is usually long enough, which makes the installments payable per month to reduce to affordable sizes. It is also advantageous because no tax is charged on the money payable to this kind of loans, therefore, keeping them affordable. The interest rates through higher than that of a permanent mortgage loan, the interest rate applicable is based on the money market which will affect the Retail Prime Lending Rate (RPLR).