What Are Construction Loans

A construction loan is a short-term loan that covers only the costs of custom home building. This is different from a mortgage, and it’s considered specialty financing. Once the home is built, the prospective occupant must apply for a mortgage to pay for the completed home.

The Different Types Of Construction Loans

·      Construction-Only Loan:

o  Short-term and usually issued for a year. It’s meant to cover only the actual construction period.

·      Construction-To-Permanent Loan:

o   A financing option that prospective custom home builders can apply for.

o   One-time loans that fund construction and then convert into a permanent mortgage. During the construction phase, borrowers make interest-only payments.

·      Renovation Loan:

o   Renovation loans, also known as FHA 203(k) loans, can be used for home renovation and are insured by the Federal Housing Administration.

o  This allows borrowers to both purchase and renovate their new home while still making one monthly payment to cover both costs.

·      Owner- Builder Loan:

o   Some prospective home builders wish to act as their own general contractor, 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.

·      End Loan:

o   A traditional mortgage loan that a home buyer or home builder (if you’re building your own home) can apply for after the

o  You can get an end loan if construction is complete on the home.

Requirements For Construction Loans And How To Qualify

Construction loans often come with higher qualifying standards in terms of credit score requirements and down payment amounts.

·      Minimum 20% down payment is required, and a 25% down payment requirement is not uncommon. In addition

·      Most construction loans require a minimum credit rating of 620.