The amount of remodel and new construction going on in California is phenomenal.  I can't remember a period where so many neighborhoods have gone through such a transformation!  However, let me remind you that construction is not for the weak hearted, this can really put a marriage or partnership to test!!!

Construction loans are primarily geared towards borrowers that have excellent credit and assets.  The last thing a lender wants to do is take over an unfinished house.  There are construction loans available to borrowers who verify income and also stated income loans as well.  The trend is that lenders are tightening their belts and are really limiting their loans to highly qualified borrowers.

There is a wide variance in what lenders offer for programs and interest rates, so you want to ideally be in touch with a lender who knows the best place to take your loan.

Construction loans are available for:

• Ground up construction
• Demolish & Rebuild
• Remodel
• Rehabilitation

What is a construction loan?

A construction loan is exactly what is sounds like, a loan to do construction work.  As a lender we look at this on a loan-to-cost basis than loan-to-value.  Yes, we still need an appraisal, but lenders will lend on the cost not the value. 

Most construction loans are for a 12 month period on an interest only basis for the amount that the borrower has drawn.  So let's say that you have a construcion loan for $1,000,000 but you have only so far borrowed $150,000, you will only make interest payments on the amount you have borrowed.

After the project is complete, the construction loan is due, so you will have to get permanent financing should you decide to keep the property.

What is a construction-to-perm loan?

The main difference between a construction loan and a construction to perm loan is that under the construction loan the borrower has to one year down the line refinance and come up with a permanent loan.  Under the construction to perm financing, the final rate and program are determined up front, so the borrower is essentially only getting one loan, versus two in the other scenario.

What do I need to provide to get a construction loan?

The amount of documentation is rather extensive!  In addition to all the paperwork for the regular application, the following will be needed:

• Constrcution contract
• Building permits
• Cost breakdown
• Copy of contractor's license and builder application
• Set of Plans & Job Specifications