What are split contract construction loans?
Looking to purchase a house and land package? A split contract could be the perfect option for you!
You’ll sign two separate contracts - one with the Developer for the land, and another with the Builder for construction of your new home. All it takes is just a 5-10% deposit payment on your build contract to get started!
What are split contracts?
A split contract for a construction loan is a contract between a lender and borrower that allows the borrower to obtain funding in stages for their building project. People often use it if the construction project is too large to be financed with one single loan.
The loan is split into several stages, each with its own borrowing amount, interest rate and repayment schedule. This type of loan can be beneficial for projects that require frequent capital injections from the lender.
It also allows the borrower only to borrow as much money as is needed for each stage of the project, reducing any financial burden on the borrower.
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Example of split contract in real estate
For example, let’s say you purchase a house for $200,000. You could enter into a split contract with the seller and agree to pay $100,000 upfront, with the remaining $100,000 paid within six months.
You can arrange for two separate loans of $100,000 each to finance your purchase. This allows you to get into the real estate market without having to pay all the funds upfront and gives you more flexibility regarding financing options.
Why do banks see split contracts as risky?
Although split construction loans can benefit borrowers, they are considered higher risk by banks. This is because the repayment terms of each stage must be agreed upon, and if there are delays in any stage of the project, it would not be easy to repay the loan on time.
Additionally, lenders often require guarantees or collateral from the borrower to secure the loan. If a borrower cannot fulfil their obligations under the contract, the lender can take legal action against them.
For these reasons, banks are often hesitant to offer split construction loans and usually charge higher interest rates than single-payment loans.
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How do I get approved for a split construction loan?
To be approved for a split construction loan, borrowers must demonstrate that they can repay it. This typically involves providing financial information such as income, assets and liabilities.
Borrowers should also ensure that their project’s plans are realistic and feasible in budgeting. Finally, it is essential to ensure that all parties understand and agree upon the repayment terms of each stage.
With proper planning and preparation, borrowers can be approved for a split construction loan and successfully finance their projects.
How are split contracts beneficial for investors?
Split contracts are excellent for investors looking to buy real estate properties. When using split contracts, investors can purchase an entire property from one seller but divide the payment into two or more parts.
The investor will then make arrangements with separate lenders to finance each part of the transaction, allowing them to use different financing options that work best for their particular situation.
This can also be beneficial when dealing with multiple owners, as each owner is only responsible for their portion of the payment.
Split contracts are a great way to get into real estate investments without having to invest all your funds upfront, and they can help you save money on interest costs and taxes.