- Emma Parker
- July 8, 2021
The practice of borrowing loans has been running for a long. Although in the past days, the variations of loans limited to a certain scale. But with increasing popularity, several types of lending habits originated.
If a person required funds to incorporate his business, then applying for business loans completely perfect for him. On the other hand, if a person requires funds for either medical emergencies or weddings or for conducting a tour, he can easily borrow money in the form of a personal loan. It is quite common nowadays for people to borrow construction loans while building their dream house.
If you did not know about a construction loan, you should start reading this blog by now, and I will take only 8 minutes to clarify the concept of the construction loan, how it works and the basic difference with builder loans.
What is construction loan?
It is completely different from mortgage and house loans. Rather a short tenure loan needs to be repaid within two years. Generally, borrowers used to apply for such construction loans to construct the house’s interior and exterior instead of building the entire house.
Although both of these house loans and construction loans almost sound the same, a borrower fails to discriminate the differences and cannot apply for a short-term construction loan. After the amount disbursal, when a lending company asks for a high repayment amount, a financial crisis occurs.
Usually, this type of borrowing habit perfectly suits real estate owners who require money after constructing the building. With the borrowed amount, the real estate planner wants to cover the value of the building construction expenses. He uses the surplus amount in decorating the building for the attraction of people.
However, before applying for a construction loan, one should not forget that he has to pay the high interest rate applicable to a mortgage loan, even on the disbursal of a house loan.
On the one hand, small repayment, and, on the other, high interest rate, thus making it completely burdensome for borrowers. For this reason, one should analyse properly whether he should take out such a construction loan or not.
What are the important things to consider before applying for construction loan?
As it is specially designed for real estate planers so, the lender usually agrees to part payment. Besides, to qualify for the disbursal of a loan, lenders may ask for a 20% down payment to avoid collateral damages.
However, some lenders may ask for up to 25% down payment to judge the capability of the real estate planner.
On the other hand, lenders will check the credit history of the borrower thoroughly to find eligibility. If the credit score goes below 700, then it becomes difficult to secure approval of a loan.
The one and only reason for such a thorough credit check is the incompletion of the building. As it is yet to complete and if not sold, it won’t be easy to revive the entire amount, so lenders do not compromise with the credit score.
Before sanctioning a loan to borrowers, a lender may also ask for the location of the building. Suppose the money lending company finds that the locale is in the midst of the market area or any other profitable location.
In that case, it will approve the loan easily as there is a good prospect of earning revenue, so lenders do not worry about the repayment.
How does it work?
This type of loan is not suitable for individuals but is most suitable for real estate planners whose business focuses on building constructions and selling them. Moreover, this type of loan is a short tenure loan with high-interest payouts. If a borrower fails to repay the entire amount within two years, he has two options.
- Either mortgage the property
- Or borrow another personal loan to repay the entire outstanding amount.
Besides, a borrower might repay only the interest amount during the building is under construction. If the borrower disagrees with interest payment, then the lender might ask him for the complete repayment once the building is complete.
Although this type of loan is not suitable for an individual, if one person wants to borrow such type of construction loan, he must ensure that the house is under the grief of a developer.
Therefore, all the paperwork will be completed in the person’s name, but the money will be paid to the constructor.
Difference between construction loan & builder loans
- While construction loan is completely dedicated to building developer and not for individual persons, an individual easily to complete his dream home can apply for builder loans.
- While construction loans come with high interest and short repayment tenure, builder loans are not associated with either higher or short-term repayment. Rather this type of loan is more like a house loan.
Emma Parker is a financial counsellor at LondonLoansBank and has been serving for over 5 years. She is a psychology graduate from the University of Glasgow. Since she has keen interest in the finance field, she pursued a diploma course in banking and finance that led her to opt for her current career. She assists people choose the best loan based on their current financial situation and credit score. As Emma understands how people react to money problems, she gives them a helping hand to solve their financial complications.