Financing home loans, especially when economic times aren't conducive to borrowing, can be tough
enough. When you want to finance a residential construction project with a residential construction loan,
the challenge bar just got raised 10 feet higher. These kinds of loans are difficult to locate, they tend to be
very technical, and they definitely don't follow the model of a standard 30-year home loan.
All these obstacles, however, need to be overcome if the homeowner wants to have his own custom-
made house and doesn't have the cash up front to pay for the work. Since only one out a handful of
people pays for their new home with money on the table, a residential construction loan becomes a
necessity in most cases.
Types of Residential Construction Loans
The first thing to remember about a construction home loan
is that it doesn't follow the time plan of a conventional home
loan. Residential construction loans are provided on a
short-term basis, long enough to get the construction
project paid for and finished. Then payment is expected. So
why would anyone get such a loan? Because once the
property is built, it can be used as collateral for a
conventional home loan. This is the approach used by
homebuilders, except the borrower becomes the home-
buyer rather than the builder.
The first type of residential construction loan goes by the
name of the all-in-one loan. It can also be referred to as a
construction-to-permanent package or a rollover financing.
The rollover include requirements that change the loan to a
traditional home mortgage once the construction is
complete. This choice skips the step of having to seek
refinancing after the building phase ends, ergo the name "all-in-one." Depending on the lender, the loan
conversion can be changed into either a 15-year or 30-year fixed mortgage.
The construction-only loan does not automatically convert. This financing follows the two-step approach
of having to apply and get approved for two different loans. As noted earlier, the construction loan comes
due at the end of the build phase and must be paid off in cash or with the proceeds from a traditional
home mortgage loan.
The major benefit of the two-step approach means that the borrower is not locked into one specific
package. He can compare traditional mortgage offerings from different lenders to get the best deal. This,
of course, assumes that the borrower has good enough credit to be sure of being approved in time to pay
off the first loan.