When a home or other building is being built or renovated, there will typically be a loan involved to fund the project. Just like with a traditional mortgage, if the parties involved fail to make their payment as agreed, the property can enter foreclosure. When learning about situations in which a construction loan can be foreclosed, it is important to know what type of loan is involved. For construction projects, there are two main options, which are:
- Construction to Permanent – A construction-to-permanent loan starts off as a construction loan, but as soon as the project is completed, it transitions into a traditional mortgage loan, with the home being the collateral. This is commonly used by individuals who are having their new home custom built.
- Construction Only – As the name implies, construction only loans need to be paid back either during the construction process, or shortly after it has been completed. In most cases, this type of loan is used by builders who are building spec homes specifically to sell.
When Can a Construction Loan Be Foreclosed?
Just like a traditional loan, a construction loan can be foreclosed upon at any point when the borrower fails to make their payments according to the contract for a sufficient amount of time. The following are some of the different scenarios when a construction loan will likely enter the foreclosure process:
- Missed Draw Requests – Most construction loans are funded incrementally as milestones in the project are met. If the milestones can’t be met for some reason, then additional funding will not be provided. This can cause the construction project to come to a halt, and the borrower unable to pay as agreed, which can lead to foreclosure.
- Conflicts Resulting in Non-Payment – Conflicts between the borrower and the construction company can result in a work stoppage. If a project with a construction loan is not progressing as needed, the lender will begin demanding payments. If the borrower does not have sufficient capital to make payments, the foreclosure process will begin.
- Non-Payment Due to Being Unable to Sell – After a construction project with a construction only loan is completed, payments (or possibly payment in full) will be needed. If the builder is unable to sell the property, the lender may initiate the foreclosure process.
- Failure to Pay Traditional Mortgage – If a construction to permanent loan enters the traditional mortgage phase, and the borrower is unable to pay, the mortgage will soon go through foreclosure.
Working with an Attorney
If you are facing foreclosure on a construction loan, it is important to take the appropriate steps to protect your legal and financial interests. Contact FCLG to discuss your situation, and come up with an effective plan of action on how to proceed. We have helped many people in Florida avoid foreclosure, and we would be honored to help you too.