What is a Construction Loan Agreement?

If you are planning to build your own home, the entire process can be extremely overwhelming. There are very few projects you or anyone else can take on that are more stressful and more prone to problems. One of the most dizzying aspects of building your own home is having a grasp on all of the legal agreements and contracts that you will need to enter into to get the job done. One contract that you will need to have a working knowledge of is a construction loan agreement. Let's take a look at what a construction loan agreement is and why having one is so important.

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To put it simply, a construction loan agreement is made to any individual, business or group who needs to raise funds for a major building project. It could be something as simple as a single family home or something as complex as a shopping mall. The agreement itself is fairly simple in terms of how complex it is. Every day, there are tens of thousands of these agreements signed in the United States by families looking to build their first home and by businesses looking for that next great investment.

The construction loan agreement is a short term loan agreement. These types of loans are never made for permanent financing of a project, but simply to help progress construction along or to help finance the initial groundbreaking. They are often repaid quickly with funds from the permanent financing option within only a few months.

While it is possible to get a construction loan agreement without permanent financing, almost all individuals and businesses get loans like these after permanent financing has been approved. Unlike many other types of loans, the entire loan amount is seldom released all at once; instead, the necessary funds in the loan are divvied out when needed to help keep construction progressing forward. This helps individuals from squandering much of the loan or spending more of it then they need to. If a business is seeking a construction loan agreement, most banks require personal guarantees for the loan to move forward.

The maximum term on a construction loan agreement is only 12 months, which puts pressure on the borrower to repay the loan as quickly as possible. The interest rate for these types of loans is plus 1 percent of prime and is adjusted monthly. For these types of loans, borrowers are completely responsible for all third party costs and points can be bought with these types of loans to keep long term costs down.

When it comes to drawing up a comprehensive and reliable construction loan agreement, clarity is the main goal of every good document. The biggest challenge you'll face is defining the terms and conditions so that both the borrower and the lender agree upon the final set of terms. While a general construction loan agreement template can sometimes be used, each individual loan is often utterly unique and a completely original agreement is often needed.

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