A construction loan is distinct from a mortgage loan, which is what many homeowners are most familiar with. Once a house has been built and the certificate of occupancy obtained, the homeowners need to secure a mortgage loan (unless they can pay fully in cash). Before that point, future homeowners typically need cash up-front to begin construction. The arrangement between a lender and borrower to exchange money for construction expenses is referred to as a construction loan.
Two Types of Construction Loans
Most construction loans are classified as either construction-to-permanent or construction-only. Of these, many more construction loans are classified as the former. Construction-to-permanent loans morph from a pure construction loan to a traditional mortgage loan once the structure is completed.
Construction-only loans generally have higher interest rates than traditional mortgage loans, though the rates somewhat align with prime rates. The main reason for these higher rates? Lack of collateral. A mortgage lender has the actual house or building to seize if the borrower stops making payments. A construction loan doesn’t offer much in the way of collateral, which is why the lender usually makes routine disbursements (draw schedule). However, the borrower pays only interest payments during construction.
Construction Loan Foreclosures
For many reasons, construction loans are more susceptible to foreclosures than traditional mortgage loans. One reason is that more parties are involved. While a mortgage involves the borrower (property owner) and lending institution, construction loans involve lenders, borrowers, contractors, suppliers, and subcontractors. The more parties involved in a monetary transaction, the more likely a conflict or miscommunication will occur.
Conflicts between parties to a construction loan can either result in or arise from draw schedule disputes. The lender typically disburses a portion of the principal upon achievement of certain milestones, such as appointing a contractor, setting the structure’s foundation, or pouring concrete. Draw conflicts ultimately result in non-payment, which is the singular catalyst for foreclosure.
Fortunately, the terms of a construction loan are generally more flexible than those of a traditional mortgage loan. That often makes it easier to work with other parties outside of the formal process of foreclosure, which is the most expensive option. Sometimes, however, foreclosure is all but inevitable.
Florida Construction Law Group is well-prepared to defend against or prosecute a foreclosure action. We have years of experience navigating the nuances of construction loans. Whatever the nature of your construction dispute is, we can help you find a resolution. Call our firm today at (305) 227-4030 to discuss your options.
