Construction Loans
Construction Loans are different than anything else out there.
A lender has to know the story behind the planned construction before they're willing to loan you money.
It's not going to be standardized like mortgage loans underwritten to Freddie Mac or Fannie Mae guidelines.
However, there are some common features to a construction loan. Construction loans typically require interest-only payments during construction and become due upon completion. Completion for homeowners means that the house has its certificate of occupancy.
Construction loans are generally variable-rate loans priced as a spread to the prime rate or some other short-term interest rate. The contractor (you) and the lender establish a draw schedule based on stages of construction, and interest is charged on the amount of money disbursed to date.
Another variable in construction loans is how much of the project cost the lender is willing to lend. If you already own the land, then that can be considered as equity on the construction loan.
Many homeowners use construction-to-permanent financing programs where the construction loan is converted to a mortgage loan after the certificate of occupancy is issued. The advantage is that you only have to have one application and one closing.
You could also purchase a rate-lock agreement valid through the expected completion of the construction. (If you go this route, you'll want to ensure you allow for construction delays)
A construction loan, unlike a mortgage, isn't meant to be around for a long time.
You may be willing to pay a higher rate on the construction loan if you're doing construction-to-permanent financing and can get better mortgage terms or a longer, better rate lock from your lender.
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