6 Types of Construction Loans You Can Use for Building Your House

People who desire to create homes, businesses, or other real estate types can apply for building loans. Explore some construction loans that could serve as potential funding sources for building your ideal home.

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1. One-Time-Close Construction Loans

Combining the building loan and the mortgage on the project's completion into a single loan is often called an all-in-one or construction-to-permanent loan. Since the terms of these loans are difficult to change, it is better to apply for them when you understand the design, the costs, and the timeline.

There is only one approval procedure and one closing for the loan, which keeps the process straightforward and lowers the costs associated with the closing. 

2. Two-Time-Close Construction Loans

Essentially, two distinct loans make up a two-time-close loan: first, a short-term loan for the construction period, followed by an independent permanent loan for a mortgage on the finished building. When you complete the building construction, you are essentially refinancing the loan because you will need to seek approval and pay closing expenses again. 

Accordingly, amounts payable will be minimal during the construction phase; however, as additional funds are disbursed, the interest payment obligation will escalate. The loan may be for a maximum period, such as 12 months, after which penalties will begin to apply. Keep in mind that it is similar to a line of credit you would like to have in place if you require it.

3. Government-Backed Construction Loans

A few loan programs sponsored by the government are also available to assist with financing home construction. One option for a construction-to-permanent loan is the USDA construction loan, which the Agriculture Department underwrites. A home must be constructed in a rural area of the United States that is eligible for USDA financing and has a population of 35,000 or fewer people. Some lenders also offer Veterans Affairs (VA) construction loans; however, the only people eligible for these loans are veterans, members of the military, and, in some situations, their family members.

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4. Construction-Only Loan

Some loans are utilized for financing for the construction of a house, and these loans are known as construction-only loans. Following the completion of that construction, the total amount of the loan obligation will become payable. Another loan, such as a conventional mortgage, might be taken out to cover the remaining sum, or you could pay it off in full.

Remember that you will be responsible for closing costs twice if you do this and clear off your construction loan with a new mortgage.

5. Renovation Loan

You can look at different types of home renovation loans if you want to improve a current home instead of building a new one. Choose from several other formats based on how much money you will spend on the project. Moreover, cash-out refinance is another alternative in a low-rate environment when a homeowner takes out a higher-than-current mortgage and receives the additional payment as a lump sum. Nevertheless, as interest rates rise, cash-out refinances become less tempting.

6. End Loan

According to Steve Kaminski, head of U.S. Residential Lending at TD Bank, an end loan is nothing more than the homeowner's mortgage once the property has been constructed. A construction loan is utilized throughout the construction process and is repaid upon completion of the structure. After that, you will be charged a standard mortgage, an end loan.

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