What are the Differences Between Construction Loans?

Estimated reading time: 2.5 minutes

Building a new home can be a rewarding and enjoyable experience. People may build their own homes for a variety of reasons, such as creating a home that matches their exact needs or lack of inventory in their local market. Construction loans operate differently than traditional mortgage milestones, so let’s go over a few basic differences between some of the most popular construction loans.

Generally, How Do Construction Loans Work?

Unlike a traditional mortgage, which pays for an existing home, construction loans cover the costs during the building process. This may include the land the home will stand on, labor costs, and materials. Construction loans also tend to have higher interest rates than a traditional mortgage because of the different variables that go into constructing a home, such as builder timelines, approvals, and delays.

What is an End Loan?

New construction end loans are very similar to a traditional mortgage. Borrowers apply for financing prior to or during construction of the home. Like a traditional mortgage, end loan terms are typically up to 30 years and can be offered with fixed or adjustable interest rates. Rate locks are a major difference between a traditional mortgage and an end loan. A mortgage that has an existing home can usually close within 60 days, thus requiring a shorter-term rate lock. A new construction home can take anywhere from 4 to 8 months to build and require a longer rate lock period, upwards of 360 days.

What is a Construction-Permanent Loan?

A construction-permanent loan allows you to borrow funds for the construction process. This short-term loan is typically disbursed in periodic installments throughout the building phase. Your lender may be much more involved during the construction process. They will ask to see your build plans, the projected budget, and even the build schedule. Because there is more risk involved with the many variables, the application and approval processes for construction financing may be stricter than a typical mortgage.

During the disbursement process, you’re responsible for interest-only payments during construction. The money is advanced, or disbursed, in draws based on a schedule to the builder throughout the stages of construction. Once construction is finished, the loan is converted to a permanent home mortgage by the lender. This type of loan consolidates two loans into just one, resulting in fewer closing costs.

Does Homestead Funding Offer Construction Loans?

Homestead Funding does offer construction loans. However, only certain states and regions are eligible. To find out if you qualify for a construction loan or one of our renovation loan programs, contact us today!