There are many Arizona Construction Loanoptions on the market today. Knowing key differences makes it easier to get approved and find the right financing for your needs.
Sometimes called a construction-to-perm or a C-to-P, an Arizona Construction Loangives a borrower the financing her or she needs for an extensive project. More often than not, it references building a structure from scratch, but it can also relate to performing extensive renovations on an existing property. Although C-to-Ps can be leveraged by homeowners who are tackling their own projects, they’re mostly leveraged by builders and developers who need a cash injection to get a project started and then plan to pay off what they’ve borrowed when a buyer takes interest in the property and then secures his or her own financing.
Banks often shy away from financing these types of projects because they can’t turn around and sell the property quickly if the borrower doesn’t make good on payments, and they aren’t in the business of holding. That means many people who need funding will have to look outside banks to get it, and each lender will have its own criteria as well as different packages available,
That said, these financial products vary in structure and the monthly payments will vary greatly from one to the next as well. It’s also important to note that, even when financing is used for rehab or renovation purposes, it works differently than financing specifically created for those purposes. Let’s take a look.
Most investors going for an Arizona Construction Loanwill be looking for a short-term option with two closings. This involves drawing funds as needed, with the principal balance increasing over the months financing is active. The borrower typically pays interest-only payments for the duration. A second loan process and closing occurs when construction is complete, providing long-term financing for the property. The second closing is usually handled buy a buyer, but it can also be handled by a builder or investor who wants to hold the property. As an alternative to this, a single-close option is sometimes available. However, it typically only applies when the individual securing the financing plans to hold the property for an extended period of time. In these cases, cash can still be pulled as needed during the build and interest-only payments are made. However, once construction is complete, the loan is automatically modified to fully amortized payments.
An Arizona Construction Loanis often ideal even if a project isn’t starting from scratch, simply because there aren’t typically rules about how much of the funds need to go directly to improvement. There may also be differences in where the funds are held—an interest-bearing account versus drawing from the loan—and in when mortgage insurance is necessary. If you’re not sure which one is best for your circumstances, connect with a broker who specializes in both and can help you find the best structure and financing for your needs.
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