Construction Loans and Permanent Loans

Real estate developers need two types of mortgage loans: construction loans and permanent loans.

Construction loans do what their name suggests. A developer borrows these funds to pay for the cost of construction, and the funds tend to be advanced as construction progresses. The developer-borrower is usually not obliged to repay the debt until construction is finished (or an outside date in case construction takes much longer than anticipated). Usually, the developer-borrower is not required to pay interest either–at least not until the project is completed. Lenders tend to advance the funds the developer needs to pay the interest.

A new lender comes into the picture when construction is concluded and tenants begin to occupy the property. This lender is called a permanent lender, but do not let the name deceive you. Permanent loans are not permanent. They are merely long-term loans disbursed on or after the substantial completion of construction. How long is long term? That depends on the mortgage market. Sometimes it is as much as thirty years, and sometimes, it is as little as five years.

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