Construction loan

Construction loan

A loan used to pay for land and for the construction of buildings and/or detached homes

Construction loans normally work together with take-out loans. First, the land developer gets a construction loan to build a cluster of homes. Then when all the homes are ready to sell, a buyer gets a take-out loan from a lender to purchase one of the new homes. The builder uses part or all of the money from the sale towards paying off the construction loan. If you plan to build your own home, you can also pay off the construction loan using a take-out loan.

Example: How does a builder pay off a construction loan?

The builder gets a $1 million construction loan to put up ten homes.

The builder then puts up each home for sale at $300,000.

The buyer gets a take-out loan for $300,000 to buy one of these brand new homes.

For every home that the builder sells, the builder pays $100,000 towards the construction loan and pockets $200,000 as profit.

See: Blanket mortgage, Take-out loan

	Example: How does a builder pay off a construction loan?

			The builder gets a $1 million construction loan to put up ten homes.
			The builder then puts up each home for sale at $300,000.
			The buyer gets a take-out loan for $300,000 to buy one of these brand new homes.
			For every home that the builder sells, the builder pays $100,000 towards the construction loan and pockets $200,000 as profit.