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Different Types of Construction Loans

By Brown Ezilon.com Articles Published 06/5/2011 | Construction Loans

Construction loans can be easy to understand if you have a little basic knowledge of loans in general and you do not need to be an expert in loans to be able to choose one that fits your case. In cases where you are planning to build a house from scratch you can apply for a construction loans or make a down payment and then ask for a loan to finance the rest of the costs with a mortgage.

There are three basic types of loan options you can choose from to help you finance the construction of your home: builder financing loans, separate loans and combination loans.

Builder financing loans are used in those cases where builders finance the construction of a house for a client by using the companys funds. This means that a builder will cover all the expenses during the construction phase until the completion of the house. Although this agreement may seem attractive the money certainly is not.

Separate loans are the most common form of construction financing, which starts under a form of construction loan then transforms the loan type in long term mortgage loan. You can apply for the initial construction loan with one loaning company and then follow on with the mortgage loan using a different one, or simply pass from one kind to the other using the same loaning company. Construction loans are short term loans that can last from six months to one year, while mortgage loans are long term, which can last for several years.

Combination loans are similar to the twin-loan type of loans that use a combination of loans in order to cut down on interests and expensed. You will be able to close both loans simultaneously to avoid added costs. This means that once you have received a certificate allowing you to start living in your newly constructed house the construction loan turns into a mortgage loan without having to close down the former.

Where to find these loans? You can start with the banking institution you usually use; if you carry out quite a bit of transactions you may be able to get good interest rates. They will also be familiar with your account and what you can really afford in terms of loans. Loaning companies are obviously more versed in the types of loans you may have access to and which can be more convenient for your case. There are many private loaning companies that offer slightly higher interest rates than a bank would but you can always try and negotiate as there is a lot of competition out there.

Get your papers and plans ready before you apply for a loan as you will need detailed plans, land deed and specifications. Almost all loaning companies will require an estimate of the construction costs as well as the building company who will carry out the work. You will need to provide copies of documents you may have with the builders and subcontractors including the signed contracts in order to be eligible for a loan.