Construction Loans FAQ

                               

 
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Interest Reserve, Calculation & Definition
for a Construction Loan

 
 

» How long will it take for the borrower to receive the funds after the Draw Request has been made?

   Deposits and soft cost expensed can be funded within 48 hours of receiving a paid receipt or invoice.  For hard cost expenses, the disbursement will be released after we have received an inspection report performed by our local inspector and update from the title company indicating the title to the property is free and clear of any liens.  We will review the inspection and title report and disburse the request up to the project completion percentage.  This process takes an average of 7 business days. 

   
 


»
How many inspections are allowed and what is the cost?

   Construction mortgage loan lenders typically allow the borrower to request one draw per month.  The administration Fee that was paid when the loan closed covers the inspection costs. 

» Who does the inspections?

   The mortgage company hires independent contractors, normally licensed appraisers, who perform the inspections on the their behalf. 

» What is the Lender's Contingency Account?

   A Contingency Account is money set aside for unforeseen circumstances or cost overruns that may occur during the construction or improvement of a home.  Disbursement of these funds is on an "as needed" basis and will generally be in proportion to the completion of the home.  Of course, as with other costs, a Draw Request is required for disbursement of these funds. In addition, evidence of the overrun will also be required in the form of receipts, paid invoices or cancelled checks.  Once construction is complete, any money remaining in the Contingency Account can be disbursed to the borrower upon his or her request.  

» What is the interest Reserve?

   The construction mortgage loan accrues interest as funds are disbursed on the loan and it will require a monthly payment to satisfy this accrual.  Because the borrower may be currently paying a mortgage, some loans are set up with an interest reserve account.  The interest payments for the mortgage loan are debited from the interest reserve line item.  There are generally enough funds in an Interest Reserve Account to cover all of the mortgage interest payments that may be due during the construction term.  If there is no money left in the Interest Reserve Account the borrower will need to make the interest payments.  Interest payments are due on the 1st of the month.  If the interest payment is not received by the 15th of the month, a late charge will be assessed.  Additionally, disbursements will cease until interest payments are current. 

» How are deposits for kit and modular homes handled?

   Construction Loan lenders  will typically disburse 75% of the funds allocated for the kit or modular home as a deposit.  The remaining 25% of the funds designated for this kit or modular package are disbursed when the materials have been delivered to the site ("dropped") and verified by an inspection.  If there are multiple drops required for the delivery of the materials, we will only pay for the materials delivered to the site.

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