Construction Financing for New Homes

Building a new home is exciting. However, the process is complicated. When a used home is bought, the borrower receives a single home loan, and relocates to their new property. With a new construction property, buyers may choose between one of two finance options. There is the option of applying for two loans, a construction loan and a permanent loan. The second option involves applying for a combination loan to cover the cost of financing the construction and home price.

- Construction Loans - Many mortgage companies and banks will approve construction loans. These loans are short term, and replaced by a permanent loan once the home is built. On average, construction loans have a term of six months to one year. Rates are usually adjustable, with quarterly adjustment periods. Once the construction loan is acquired, the builder receives the funds in stages. In most case, the lender monitors the loan payout.

- Combination Loans - Using a single home loan to cover the cost of building the home and financing the sale price is much easier. When borrowers apply for a construction loan and a permanent loan, they must shop for two separate loans and pay two separate closing costs. With a combination loan, the loan process is less complicated. Moreover, some lenders offer rebates on combination loans.

Before choosing a loan option, savvy buyers weigh the pros and cons of both types of loans. For this matter, it is important to shop for both loans at the same time. In some cases, acquiring two loans is much cheaper. On the other hand, a combination loan may produce greater savings.