Are Construction Loan Charges Legal?

Basic Fees

Basic fees include all the fixed-cost fees that lenders use to pay for specific parts of the loan application process. The lender will charge a loan application fee for creating the necessary paperwork, an appraisal fee for inspecting the property and sometimes even a commitment fee to insure the loan. These fees rarely exceed several hundred dollars each (except for the commitment fee, which can reach several thousand dollars), but lenders use them to ensure basic costs are covered, and they are common for all loans.

Point fees refer to general fees that lenders charge based on the loan amount. Lenders may use an additional point fee or bundle all loan costs up in a one point fee. Usually these fees are set at 1 percent of the principal of the construction loan. Lenders have their own standards when it comes to these fees, and while they are controlled by market forces it is rare to have loan point fees controlled by government regulation, unless a particular program is created to help borrowers qualify for a construction loan.

Construction loans are divided into stages. At the end of each stage, lenders will usually send out an inspector to look at the work done so far and make sure that it matches the requirements of the construction plan created at the same time as the loan. Only then will the lender release funds for the next step in the building process. These inspections have inspection fees, which the lender often requires the borrower to pay. As another third-party expense, it is common and completely legal for the lender to charge borrowers for this cost.

At the end of the construction loan, usually around one to two years, lenders will change the loan into a real mortgage, with a better interest rate and a much-longer, up to the 30 years. At this point the lender may charge additional loan costs to convert the loan. This can vary by lender and is often based in what the loan contract states when it comes to rolling over the debt into a new form.