In addition to buying existing homes, we see a number of people who choose to build. In this case, a number of different loan options would be available, one of them being the construction loan. Different from a traditional mortgage, a construction loan is money that finances the construction or building of your new home.
Typically, construction loans are handled by Fannie Mae and Freddie Mac, both governmental entities. One of the major differences with this type of loan over a standard home loan is that the construction loan makes the lender privy to the reasons why you want to build. Based on this information, the loan would or would not be approved.
Another difference found with a construction loan is that not all of the money is paid upfront. With a standard mortgage loan, the money is provided by the lender all at once at which time you make payments to repay it. However, with a construction loan, the money would be provided in five to ten draws based on the stage of building. For instance, during the foundation pouring and framing phase, the required amount of money would be provided. Then during the heating and cooling system installation, another portion of the money would be released, and so on.
When securing a construction loan, you will find several variations. For starters, there is the construction only loan, which is a short-term loan that would eventually be replaced or converted into a traditional mortgage loan after the building is done. If the construction of the home were financed, a construction only loan would be a good option, providing you with opportunity to find the right lender and low interest rate.
Another option is the construction to permanent loan. In this case, the loan would be converted to a traditional mortgage loan but in this case by the same lender. However, the other stipulation is that occupancy must be achieved first. The benefit of this type of construction loan is that both time and money are saved since the mortgage application is completed just once and closing is a simpler process.
Then, there is the rate lock, construction loan. Sometimes, a lender will allow you to lock into a current rate on your mortgage for up to 12 months but only while construction is occurring. The primary benefit here is that you would not have to worry about interest rates going up. Keep in mind that if rates were to drop, your lender may also suggest what is called a “float-down” option in which he or she would be able to take advantage of the reduced rate.