Construction Loans

Written by Liza Hartung
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Construction loans are given out when you are in the process of building a house. This allows you to pay the contractor when you can't do so out of pocket. It's a wonderful kind of loan in that it is specific to the needs of building a house. A construction loan is known as a "story" loan. This is because you have to tell the lender the entire story of the upcoming construction.

Unlike a mortgage, this kind of loan is not standardized or underwritten. While construction is going on, you usually only have to make payments on the interest. When the house is finished (that is, when it has its certificate of occupancy), you begin to pay off the whole loan. However, these kinds of loans are not meant to be drawn out over a long period of time.

You can, if you like, turn your construction loan into a construction-to-permanent loan. This is when the original construction loan becomes your mortgage loan. Many people choose this option because there is the simplicity of only one application and one closing. It's also a good idea to purchase a rate-lock agreement that is good until the expected end of construction.

Getting the Money

When it comes to loans, such things as your credit score and your current financial situation will determine the money you get. However, if you already own the land that the house is being built on, you can use that for collateral. There might be similar things in your situation that you can use as equity. Talk to your lender about what you can do.


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