Construction Loan

You can take construction loan for building your home from ground up or to perform some major upgrade. Unlike usual mortgage loans, construction loans are treated as story loans, which means that the lender has to know the story behind the planned construction before they issue a loan to you. That is the reason why it's not going to be as standardized as mortgage loans which are underwritten to Freddie Mac or Fannie Mae guidelines.

Construction loans typically require interest-only payments during construction and become due upon completion. Completion for homeowners means that the house has its certificate of occupancy. Often, getting approved for a construction loan can be tricky. In many cases, two loans are required--one for construction and one for permanent financing. Usually you will have to pay closing costs on both loans, not to mention the extra paperwork, time and hassle involved. That is why many borrowers opt for single-close Construction-to-Permanent Loan that combines both construction and permanent financing into one loan.

Another variable in construction loans is how much of the project-cost the lender is willing to lend. If you already own the land, then that can be considered as equity on the loan and gives you lot of advantages.