Construction and Lot Loan Financing Overview
Construction loans are designed to fund the construction of a new home or renovation of an existing home. The structure of a construction loan varies depending on whether you're buying a lot and obtaining a construction loan simultaneously or whether you already own the lot on which you want to build. Generally, construction loans start with a zero balance that increases over the construction period. Construction loans can be used to payoff an existing lot loan and build a home all in one transaction. Construction loans come in two common structures:
Construction-Only loans are construction loans that are used just during the time period needed to build or renovate a home. Most have a 12-month construction period. Payments are usually interest-only during this time. Upon completion of the home you would need to obtain a permanent loan. This is often accomplished by refinancing the construction loan with a Conforming, Conventional Loan or a Jumbo Loan.
Construction-Permanent loans are construction loans that are used to build/renovate a home as well as for the permanent loan. These programs typically have an initial 12-month construction period which works very similar to the construction-only loan described above, however, at the end of construction the loan would automatically convert into a permanent loan. At that time regular principal and interest payment would begin and it would function like a traditional conventional, conforming or jumbo loan.