There are 3 different methods of financing a construction project for building
your new dream home in today’s mortgage marketplace.

Lot Loan

The lot loan is usually for a 12 to 18 month term and is a short term loan intended to secure the future site of construction for a family or individual still shopping for a builder, contractor, etc.  This loan is traditionally based upon prime, however, there are fixed venues available.  This loan only secures financing for the land itself with no improvements and is traditionally paid off either at construction close or at the permanent financing when the home is complete.

Construction Only Loan

A construction loan mortgage is traditionally taken out as well on a Note with interest only payments due monthly for the amount of money drawn to the builder.  Traditionally, a series of 4 draws are given to the builder with lender and borrower authorization as the house completion progresses.  This loan can also be taken out with a 6, 9, or 12 month construction term, which means the builder must complete the house within this time frame in order to payoff the construction note with the permanent financing.

Construction-Permanent Loan

A single close loan has the construction financing and the permanent loan all wrapped up in one financial transaction.  The consumer closes one time at the beginning and achieves the construction financing and all draws being delivered to the builder.  Upon completion of the home the borrower can “modify” or “rollover” to their permanent financing with a small fee if the lender requires it, and just several documents necessary for signature.  This eliminates two sets of closing costs and closings, yet has a potential to narrow the opportunity of products available to the consumer for the permanent financing.

Each of the above options offer many benefits, depending on how quickly the construction process can begin.  Remember these tips as you begin construction for potential roadblocks with construction financing:

§         Is your builder approved with your Construction Lender?

§         How is your land zoned?  (Residential is needed for Single Family Construction.)

§         Do you have the verifiable minimum down payment?

§         How long do you intend to be in this home?  (To determine if you want an alternative product for permanent financing.)