A construction loan is a short-term loan that is used to pay for the construction of a project for a piece of real estate. Most of our lenders offer residential construction loans. However, we do have some very good commercial construction loan lenders, as well. There are many different kinds of construction loans, conventional, unconventional, rehab, home improvement, one time close and construction to permanent.
Construction loans can be used for additions, remodels or new home construction. For new home construction, on these projects, since the final collateral has not been built yet, the proceeds from the construction loan are dispersed gradually as the home is built. Basically, the construction loan acts like a big line of credit. Before the project starts, there is a zero dollar balance, but as the lot is acquired and as work commences, money is dispersed from the loan to the construction company to pay for the work and supplies. As more work is being done to complete the job, the balance of the loan climbs. When all the work is done and all the bills are paid, the final balance will get paid off by a long-term mortgage.
During the project, you only pay interest on the amount that you use not the entire amount of the final construction loan; you don't want to have to make a big payment on a house that you don't even live in yet, especially when you're already responsible for your existing housing expense. Also, the payment, depending on the loan program you choose, is not due each month, it gets paid out of your construction loan just like a bill from the builder or supplier. So if you're still in the process of selling your current home, this could be the construction loan for you.
When the home is finished, the construction loan will be paid off by the new mortgage that you obtained either in conjunction with the construction loan or a completely new mortgage loan. At that point, your payment will then commence on your 15, 20 or 30-year loan.
Construction to Permanent. This program, the construction and permanent phases of home building are combined into one loan and one loan closing. A one-time application and closing result in a reduction of closing costs. There is also the assurance of permanent financing prior to construction and a guaranteed rate for up to a 12-month period, which guards against rising interest rates during construction. In addition, financing is simplified with the ease of having both interim and permanent financing handled by one lender. We offer construction and permanent financing in one easy step!