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Construction

This type of loan is usually a short-term loan that covers only the costs of custom home building. Usually, this loan is availed after the house is constructed to pay for the completed home.

However, there are several other loans available when it comes to home building, from ground-up building to completely gutting a current home so you can renovate.

So, whether you have a plot of land and need to start from scratch, have a teardown situation where the current home has no redeeming value in your eyes, or want to keep the bones of the structure but change pretty much everything on the inside, there’s likely a loan out there that’s right for you.

Types of Construction loans

Construction-Only Loan

This type of loan is short-term and is usually issued for a year. It’s meant to cover only the actual construction period. Studies have shown that many lenders don’t offer this type of loan. Many lenders do not like this type of loan since it has so many variables like the builder’s cooperation, getting approvals from local municipalities, and more.

This type of construction loan is also considered a considered higher-risk loan.

Higher-risk loans are usually harder to qualify for and the interest rates will likely be higher than a traditional loan. Moreover, if you decide to go this route, you’ll have to pay a second set of loan fees when you apply for a traditional mortgage.

Construction-To-Permanent Loan

This is a type of loan that prospective custom home builders can apply for.

Much like construction-only loans, construction-to-permanent loans are one-time loans that fund construction but then convert into a permanent mortgage. During the construction phase, borrowers make interest-only payments.

It’s important to note that these types of loans can be much more expensive than traditional mortgages, so if you decide to go this direction, be sure to shop around, compare rates and find the best deal before you pull the trigger.

Owner-Builder Loan

Usually, when you build a home, there’s a general contractor who essentially acts as the quarterback of the whole operation. They make sure the framing people, the tile people, the wood floor people, the painters and so on all work in coordination to get your home completed (ideally on time and on the budget).

However, some prospective home builders wish to act as their general contractors, and some banks offer owner-builder loans just for this purpose.

These types of loans generally require the borrower to demonstrate through experience, education and licensing that they have the needed expertise to oversee the home’s construction. Sorry, no newbies are allowed here.

End Loan

An end loan is a traditional mortgage that a home buyer or home builder (if you’re building your own home) can apply for after the new home is constructed.

You can get an end loan if construction is complete on the home. One good aspect of an end loan is that the mortgage application for a newly constructed home is the same as it is for any other home. Less complicated is always appreciated when it comes to financing applications.