Construction Loan Foreclosure

If you are rehabbing a home, you can obtain a construction loan to pay for the repairs. An owner/builder may obtain a construction loan to build his own home.  The term of a construction loan is usually six months, unless extended. After the loan closes, the funds are placed in an escrow account. They are released by the lender to pay for work that has been completed.  Once all work is completed, the borrower is given a permanent loan to pay off the construction loan. 

Defaulting on a Construction Loan

If the work does not commence within 30 days after the loan closes, or stops for more than 30 days or is not moving forward in a timely manner, the lender may consider that the loan is in default, unless an extension has been granted.  Amounts left in escrow will be used by the lender to pay off the contractor or subcontractors. The balance of the funds will be applied towards the loan balance.  The lender can institute foreclosure proceedings, and your property will be in pre-foreclosure and sold at a foreclosure auction if you don’t pay the loan balance.

Avoiding Construction Loan Foreclosure

You should speak to your construction lender about your loan terms and closing costs to make sure you can afford to repay the loan. Also check the home values in the area so that you can determine how much to spend on rehabbing or building materials. Make adjustments accordingly if home prices are declining in your area in case you need to sell the home. Otherwise you could end up owing more on your permanent loan than your home is worth and increase your risk of foreclosure.       

Help From an Attorney

Real estate construction matters are complex. It is recommended that you speak to an attorney prior to taking out a construction loan. If you are in default on your construction loan or permanent loan, a real estate attorney can advise you on your options to avoid foreclosure.