Financing a construction project is much more complex than simply financing a single loan or mortgage. In some cases, a construction project may require a mortgage for the land, a construction loan for the actual construction, and a bridge loan. In some cases, however, a bank may offer several loans at the same time to help make the process simpler.
Construction loans are used to fund only construction costs on a project. They generally will not fund the purchase of land on which the structure is built. Construction loans are generally short term 6 months to 1 year. With most construction loans, you do not pay principle on the loan. However, most construction loans require monthly interest payments. The principle amount of the loan is generally repaid at the end of the loan term in a single lump sum via the use of a traditional mortgage.
In some cases, you may qualify for a bundled construction loan. Construction loans contain two components: One loan to buy the land and a second loan to finance the construction. In many cases, bundled loans are designed to convert easily to a mortgage once the project is finished. One advantage of using a bundled loan is that you will have a single closing date for both the land loan and the construction portion, allowing easier construction planning.
A bridge loan is designed to finance the construction of one home before you have sold the home in which you presently live. This allows you to remain in your present home during the construction phase of your home. In some cases, a bridge loan is used to fund the down payment on a construction loan or a bundled loan. Bridge loans are generally short term, under six months. You make no payments on the loan over the term of the loan and pay off both loan and interest on the loan at the end of the term.
Although not common for home construction, private funding sometimes plays a big role in commercial construction. The terms and conditions of private financing vary greatly. In some cases, however, private financing might be an option for home construction. In some cases, private financing for home construction are called "hard money" loans. Hard money loans are private loans for people who might not qualify for traditional financing. They are generally higher interest loans that offer less favourable repayment terms that standard financing.