Construction
Construction loans are specialized financial products designed specifically for financing the building of a new home. Here's a summary of key information about construction loans based on various sources:
What is a Construction Loan?
A construction loan is a short-term loan that covers only the costs of custom home building. This is distinct from a mortgage and is considered specialty financing. Once the home is built, the occupant typically needs to apply for a mortgage to pay for the completed home.
Types of Construction Loans:
Temporary Construction Loans: These need to be refinanced once the construction of the home is completed.
Permanent Construction Loans: Also known as One-Time Close loans, these allow for a modification of the existing loan once the building is completed, avoiding the need to refinance.
Eligibility and Use:
Construction loans can be made as conventional, FHA, or VA loans.
They can be used to finance the building of a residential home, covering costs like land purchase, labor, materials, and permits.
Comparison with Traditional Mortgages:
Construction loans are different from traditional mortgages in terms of funds disbursement, where funds are usually released in stages as construction progresses, unlike the lump-sum disbursement in traditional mortgages.
Construction loans often have more stringent qualifying requirements than conventional mortgages for existing homes.
Conversion to Permanent Mortgages:
Some construction loans can be converted to mortgages after your home is finished. This conversion typically involves less paperwork and lower closing costs compared to obtaining a new mortgage.
Financial Considerations:
Borrowers need to be aware of potential over-budget costs in construction, which might need to be covered out of pocket or by altering the project scope.