Builder Construction Loans

Builder construction loans are loans provided to a contractor or home builder to provide them with the liquid assets they need to complete a project. Most builder construction loans are granted with the assumption that the loan will be repaid, at least in part, with part of the profits from the construction project. Builder construction loans were fairly easy to obtain in the 1990s and the early part of the 21st century, but the economic downturn of the past couple of years has made the terms on builder construction loans much tougher.

When reviewing builder construction loans, the lending institution usually wants to know what kind of project the builder is looking to construct and their reasons for it. This has become increasingly important in the tight credit market, as reasons that are considered less than reasonable are frequently rejected. Depending on the quality of the argument made by the contractor, the builder construction loans can vary in the amount of money that will be loaned, the interest rate and the amount of time given to repay the note.

In past years, builder construction loans were approved in situations where the applicant had no little or no equity to use on the project, with the idea that the bank would recoup even more money with higher interest rate and longer terms. That idea backfired in many cases, as contactors holding large loans were unable to complete their projects when the construction market collapsed in 2008 and were forced to go out of business. As a result, banks have become much more demanding about the need for the applicant to have equity built up before they will approve a loan.

In most cases, builder construction loans require that only interest be paid while the construction process is underway. Once construction is complete, the principle is to be paid off. In many cases, the money is released in portions through the life of the project and not all in one lump sum. The interest accrues only on the amount of money released to the contractor, so they will not pay interest on the entire amount when they do not have it in hand.

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