These terms are further complicated by the fact that most banks and institutional lenders providing home construction loans also require you to quality for a take out mortgage with the same lender in order to get construction financing.
And while the types of terms are going to be very common from one lender to another, the specifics for any given term in a construction mortgage agreement can be significantly different.
Here’s a few examples of why this is important.
Length of Construction Draw Period. This represents the amount of time available to you to draw on the construction loan and can vary from 12 to 18 months among the primary institutional home construction lenders.
Take Out Mortgage Interest Rate Hold. While some lenders will provide a rate hold of up to one year on your long term take out mortgage that will be put into place at the end of the construction period, other lenders don’t provide any rate hold on the take out.
Mortgage Breakage Costs. If you choose at the end of the construction period to get the take out mortgage somewhere else, there will be a penalty associated with going elsewhere and the actual penalty and how its calculated can also vary considerably from one lender to another.
Debt Servicing. While most construction loans will charge interest only payments during the construction period, there can be exceptions to this which can include other administration costs. With cash flow an important part of the construction project to manage, this is an area that is clearly understood before finalizing a home construction loan agreement.
While these are some of the more potentially impactful terms and conditions, there will be several others that you’re going to need to read through closely and make sure you understand them so that there are no issues or surprises down the road.
The best way to make sure you’re signing up for a home construction loan that makes sense for your project is to work with an experienced construction mortgage broker who can go through each lenders terms and conditions with you and help you arrive at the right decision.