Even though I’m in the banking industry, I’ve always had a deep-seated interest in real estate—the thrill of hunting for just the right property, imagining how my family will look inside, and, yes, even the mortgage process! If you choose to build a custom home, you can add the exhilarating opportunity to add all the features you’ve been dreaming of into the design.
What is a construction loan?
When you’re considering the loan you need, there are many types to choose from. A construction loan is generally a short-term loan—usually from 12 to 18 months—that manages and disperses the costs of custom home building.
A construction loan may cover the following costs:
- • Lot or land to build on
- • Architectural plans
- • Permits
- • Labor
- • Materials
- • Contingency funds (if your project goes over budget)
Types of construction loans
Here are some of the most common types of construction loans:
Construction-only loan—Considered a higher-risk loan, this short-term, fixed, or adjustable-rate loan is used to pay for construction costs. Once the project is complete, the loan must either be paid in full or refinanced into a mortgage.
Construction-to-permanent loan—These loans also are short-term loans that cover the construction costs—but they convert automatically to a permanent fixed-rate traditional mortgage once the home is completed.
Owner-builder loan—If you’ve decided to act as your own general contractor, this could be a good loan option for you. Keep in mind, you’ll likely have to prove that you’re qualified to oversee the construction project by proving that you have the education, experience, and proper licensing.
Long-term loan—Once construction is complete and the final inspection has occurred, you can apply for a long-term loan—essentially a traditional mortgage. If your construction loan isn’t set up to convert to a traditional mortgage, this is probably what you are looking for.
Remember, construction loans can vary widely by lender—be sure to shop around to find the best option for your situation.
