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Construction Loans Explained



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hey Nate Davis here Florida mortgage

firm I want to explain the differences

amongst what people refer to as

construction loans there's a lot of

confusion out there in the public about

what truly is a construction loan so

it's pretty much going to be three types

number one a lot of people refer to a

construction loan when they're buying a

home from a let's say a national builder

who's building a home for you on their

lot now in that case in your world I can

see how someone could say oh I'm getting

a construction loan you're really not

the Builder is basically funding to

build that home and at the very end

you're gonna buy that home with an end

loan so that actually is sometimes

referred to as a construction loan in

the communities but for the mortgage

side of things that is not a

construction loan you're simply buying a

new home new construction home and

you're going to purchase it within loans

so that is one perceived type of

construction loan a true construction

loan is where a consumer goes to a

lender or a bank and gets money just to

construct the home in which they're

building now those loans are not

typically permanent loans so therefore

once the home is completed the

certificate of occupancy has issued they

were then at that point need to

refinance and pay off the construction

loan and end up with a fixed-rate or

adjustable rate whatever they prefer

standard loan the downside of starting

off with just a standalone construction

loan and later refinancing it into a

permanent loan is that you do incur two

sets of closing costs you have to pay

closing on getting the construction loan

and then later on when you refinance

into your in loan you also incur closing

costs then additionally the other

inherent risks that you face is what if

the rate market is going up on you wow

you're actually building the home so you

may have locked in your construction

interest loan but you're in loan it

could go up depending on the market it

could actually go down but that's an

uncertainty that you face when you take

out two separate loans doing the

standalone construction loan and then

later refinancing it into it

possibly the most efficient way to build

a home is to utilize a construction to

permanent loan also referred to as a

construction permanent or a CP loan the

benefit of this product is that you

actually have one closing and one set of

closing costs versus two now you can

utilize this loan to buy land while

simultaneously getting money to build

your home with one closing or another

example would be lets say that you

already own your land maybe you own it

free and clear or maybe you want the Oh

a little bit of money on that land we

will give you a loan to not only pay off

any existing lanes on the land but also

give you money to build the home that

you want and again this is one closing

one transaction one of the benefits of

this is we get the appraisal done

upfront so you don't run the risk of

having your home constructed and later

on trying to refinance only to find out

maybe you don't have the equity or maybe

the rates have changed on you you

eliminate all these uncertainties by

doing a one closing construction to

permanent loan so here's a few examples

of how you can benefit from a

construction to perm loan you can

actually build on land that you already

own free and clear and get the money for

construction

you can also buy land that you don't

currently own without the traditional

massive down payments that are required

for land only loans so you can buy the

land and simultaneously get money to

build your home with a construction

permit moment you can have land gifted

to you from a family member so if a

founder wants to gift you some family

property and then you build on it you

can do so and you can use the equity

from the property to be applied towards

your loan which may reduce or actually

eliminate the need for any cash out of

pocket depending on your builder

contract you may be able to roll in

closing cost if you own land in which

you currently already have a mortgage on

a construction permit loan will pay off

that loan that is already on your vacant

land while simultaneously give you money

to build a home leaving you with just

one and only one mortgage payment

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