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Many people
prefer to custom-design their own home, perhaps because
it's too difficult to find a home that meets all their
needs or because they want a brand-new home. A
construction loan is a loan that finances the building
of that new home.
Construction
loans are different from your standardized mortgages
usually underwritten by Fannie Mae and Freddie Mac. They
are different because the lender has to know the "story"
behind the planned construction before it will be
willing to lend money to the borrower.
They also
don't pay out all at once. Borrowers usually get between
five and 10 draws which coincide with certain stages of
construction such as:
•
Pouring the foundation
•
Framing
• Installing heating and cooling systems, wiring, and
plumbing systems
• Installing cabinets, flooring and fixtures
• Finishing work (painting, carpeting, etc.)
Construction-Only
Construction loans are usually short-term and are
converted or replaced by a standard mortgage once
construction is finished. Some people get a
"construction-only" loan in which only the building of
the home is financed. They then have the choice to shop
around for another lender and/or a lower rate once the
home is occupied.
Construction-to-Permanent
Others prefer to simply get a
"construction-to-permanent" loan in which their
construction loan is converted into a standard loan by
the same lender, once the borrower has a certificate of
occupancy. This saves time and money since the borrower
only has to fill out one mortgage application and close
once. The type of mortgage the construction loan is
converted to is decided on at close. |
