Christian Interest Only Construction Loan
A Christian interest only construction loan provides individuals with the funds needed to build a home according to their personal specifications. Homebuyers who aren't satisfied with listings in the current market or who have very specific desires for a house may choose to finance the custom-building of their own home. Interest only loans are a special type of financing when the borrower only pays the interest accrued on the amount borrowed for a fixed period of time. The principal remains unchanged during the time frame, usually during the building period of the home, and is usually paid in full upon completion or rolled over into another, longer-term loan, or in this case, a mortgage.
Often called story loans, construction loans usually are not approved until the lender understands the "story" of why the financing is needed. Unlike a mortgage, an interest only construction loan is not standardized. Interest rates are usually variable and the amount lent to a homeowner depends on the cost of the project and how much the property will be worth at the conclusion of the building period. The amount of equity already built in the property is also taken under consideration and can be used as security against the borrowed funds. In cooperation with lenders, homeowners open a line a credit to draw against. Installments begin immediately, but only include the amount of interest on funds borrowed to date. Money is lent in stages according to the phases of the project: grading the site, pouring foundation, framing the house, plumbing and wiring, installation of interior surfaces (including cabinets, fixtures and trims), and painting. However, the time period associated with an interest only construction loan is fixed, so borrowers must allow enough time for the whole project to be completed including extra time for any unforeseen delays.
Since construction loans aren't meant for long-term financing, interest rates are usually variable depending on the federal annual percentage rate (APR). Some lenders will offer to lock in rates throughout the duration of the contract, especially if the homeowner chooses to rollover the interest only construction loan into a full mortgage with the same company or decides to use a construction to permanent loan (CTP). With this type of financing, the lender automatically converts the loan to a complete mortgage. On single-close CTP loans, the borrower saves time by only filling out one set of application materials and money through only one closing. Sometimes rates for construction to permanent loans are a little higher than the variable rates at the time, but if fixed rates are lower, it might be the best time to lock the rate in for the duration of the mortgage. The traditional, double close CTP loan programs are actually two loans - a construction loan and a permanent mortgage loan - and include two sets of application paperwork and two closing costs.
Approvals for an interest only construction loan isn't as easy as securing a complete home mortgage. Application materials usually require standard information such as current address, phone number, social security numbers of the borrower and co-borrowers and other sources of income such as rental properties, disability payments, or child support. Information on a borrower's employer, paycheck stubs, as well as complete information on personal assets and liabilities must also be included. As with any other type of financing, good credit scores are very important. Most lenders won't approve loans until land has been purchased. Generally, a credit score of 660 or above is necessary to purchase land. The more equity borrowers have built up in land purchase increases their chances of approval. The application process also includes an interview with a loan officer who will explain financing options as well as help with filing needed paperwork. Any debt current debt problems should be discussed during this interview. The Bible advises us to live above reproach. "Finally, brethren, whatsoever things are true, whatsoever things are honest, whatsoever things are just, whatsoever things are pure, whatsoever things are lovely, whatsoever things are of good report; if there be any virtue, and if there be any praise, think on these things." (Philippians 4:8)
Many people have taken out a construction loan even when they have the funds available to pay for the project. Getting an interest only construction loan provides a kind of insurance that homeowners couldn't get otherwise. Since banks and lenders now have an invested stake in the property, they are very willing to provide financing expertise to the builder. A lender can evaluate estimates from contractors and suppliers to make sure that the homeowner is not getting overcharged. By dealing with these costs regularly, these "experts" know the going rates and can advise the range of prices to expect as well as warn a borrower if an estimate doesn't look right. And since they control how the money is released at the various stages, lenders will make sure that contractors are completing the job agreed upon. However, interest only construction loans do have a few drawbacks. Fees and interest rates raise the cost of a project. The paperwork process is tedious. And since forms are not standardized, the process could take longer than expected. If a project overextends the term agreed upon, the lender will charge extra fees and penalties.
And interest only construction loan can be very beneficial for an individual or family who wants to build a home but may not have all the money in hand to begin making full payments from the beginning. Since these unique loans often are made for six, twelve or eighteen months, the borrower has some time before paying full mortgage installments. Plus, by acting as builder and overseeing the construction of their home, the final product can be the home of their dreams.
Christian Hard Money Construction LoanA hard money construction loan is a financial agreement regarding a construction project that is so risky a bank will not consider funding it. Investors who back these lending agreements are willing to take high risks for high profit returns, so a hard money construction loan can typically be four or five points above a bank lending agreement in interest rate and also have the inclusion of four or five initial cost points. Since a single point is equivalent to one percent of a loan's value, these added costs can be quite pricey in a million dollar construction loan which is actually a very inexpensive project in today's dollars. Typically the lenders of these kinds of transactions base their willingness to lend for higher risk projects because of their own personal knowledge of the property under consideration. The willingness to lend the money is based in the knowledge of what the land or property is really worth and the investor will then agree to lend for about sixty to seventy percent of the property value. In most cases, a lender will require that the borrower put up the remaining amount of the lending agreement needed for the project, sometimes requiring it to be the borrower's own assets and sometimes allowing twenty percent of the remaining thirty percent to be a mezzanine loan. Even in this scenario, in most cases a lender wants to see at least ten percent of the borrower's money in the project.
The worth of the property in question and the carefulness of the provider of the hard money construction loan to only fund sixty to seventy percent of its worth gives some real security to the high risk investor. In addition, these types of lending agreements are short term, often lasting a year or less. For example, a developer finds out a beautiful farm near a city is about to go on the market. These five hundred acres would make beautiful home sites for custom homes costing over a million dollars each. The family who has owned the land for sixty years is asking ten thousand dollars per acre for this very prime land and will not sell in parcels but only in its entirety. An investor in the city is willing to craft a hard money construction loan to the developer for three and a half million dollars and five points. The five points amount to a cost of one hundred and seventy five thousand dollars just for the privilege of borrowing the high interest money.
This hard money construction loan is made because the developer knows that once the real estate goes on the market, another savvy developer will quickly devour it. So prime is this land that the developer will not even try and negotiate the price of the land downward. The investor has demanded that the developer put up ten percent of the lending agreement value and so after lengthy discussions with his wife, their house's equity, amounting to seven hundred thousand dollars is part of the collateral for the lending agreement. In addition, the developer must secure a mezzanine lending agreement, which is a supplementary loan for the remaining twenty percent. He places the holdings and assets of the development company in a lien position for the other million dollars needed. Once the purchase money is in place, the prime real estate holding is the developer's to create home sites worthy of million dollar residences. The hard money construction loan is only for one year and so the developer will also have to begin raising money for the raw land to be turned into residential acreage and putting together sources for a longer term lending agreement for at least the three and a half million plus interest.
"But God commendeth his love toward us in that, while we were yet sinners, Christ died for us." (Romans 5:8) This particular developer showed a lot of courage in putting his house and business where his dreams and vision took him, but this was the first large hard money construction loan deal that the man had put together and he failed to understand one paragraph in the very hastily drawn contract between himself and the lender. The crafty investor had entered exit fees in this hard money construction loan contract and the paralegal who just happened to be the developer's brother in law had looked over the contract and failed to spot its significance. Exit fees are often put into these kinds of contracts which call for more money to be paid to the lender when the loan is terminated. Whether the loan was paid early, on time or late, the exit fees apply. A two point exit fee cost the developer another seventy thousand dollars on top of all the other costs of the construction lending agreement.
Sometimes a Christian lender is hard to find in the area where a borrower is looking to complete a project. In this case, a construction loan broker might have to be used to locate and negotiate with a lender located some distance from the potential project site. The fact that the lender is not located in the area could possibly make the loan more expensive. For larger and more expensive projects, lenders will be groups of private investors rather than a single person or they may be companies that have large mortgage funds already put together and ready to engage with a potential borrower. In any case, it is not unheard of for a hard money lending agreement to happen in days instead of weeks or months.