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Home Construction Loans
There are a couple of different types of mortgages available to you when you are trying to build a home from the ground up, or if you are trying to remodel a used home that you are purchasing. Home construction loans tend to be geared for a new first mortgage, meaning that if you already own the home, then a is probably not the best option. In that case, you will want to consider a home equity loan, or perhaps a home equity line of credit to repair your home. The following are the two standard types of home construction loans that are available at most banks, mortgage companies, and other lending institutions.
Standalone Home Construction Loan
This type of loan is a short term loan designed for construction only. The borrower will be allowed to draw on the loan as phases of the construction are complete, or on a straight weekly, bi-weekly or monthly schedule. Because of the risk of building a new house, these loans generally carry more interest than a standard loan.
Once the construction phase is completed, the borrower will then have the option of paying off the loan with cash, or obtaining a new mortgage to pay off the construction loan. This creates a problem for the buyer, as they will have to pay for two sets of closing costs.
Combo Home Construction Loan
This is the more typical scenario for buyers in today’s market. The buyer would only be working with one lending institution and would get into an interim loan to finance the construction of the house, with the loan converting to permanent financing at the end of construction.
The draw system would be similar to a straight home construction loan, with draw periods determined before the loan contract is signed. Once construction on the home is complete, the buyer would then setup a closing date with the bank to close the permanent loan to replace the interim construction loan. This would allow the buyer to finance the entire process while only incurring a single set of closing costs.
The particulars of the loan in either scenario are based on the buyer’s credit scores, cash down, market factors and the particular lending institution’s policies and procedures. Check with your lender on the availability of a to meet your needs.
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