During the construction phase, you pay interest only on the outstanding balance, but the interest rate is variable during construction. Therefore, it fluctuates up or down depending on the prime rate. Once the house is built, the lender converts the construction loan into a permanent mortgage. Your monthly payments are interest-only and are billed monthly.
The amount of interest you are billed is based on the actual amount your builder has collected on your construction loan. Your payments will gradually increase as your builder draws funds to complete your home. You'll only pay interest on the actual amount of the loan and for the actual period of time during which it was borrowed. This ensures that you don't pay interest on funds that you didn't use.
Interest-only payments help keep total costs during construction as low as possible. Construction loans can cover the costs of buying land, drafting plans, obtaining permits, and paying for labor and materials. An FHA construction loan will also have a few more stipulations, such as land ownership included in the agreement. Construction loans are almost always “no cash out” loans, so it may not be possible to obtain this repayment under acceptable financing conditions.
For that reason, the application and approval processes for a construction loan are also more complex than those for a mortgage. The closing costs of a permanent construction mortgage are generally lower than those of an exclusive construction mortgage. Before you can get the funding needed to start your construction project, you'll need to get a loan approved. We'll help you demystify construction loans by explaining how they work, the types of funding available, and what you'll need to qualify.
That said, there are several types of construction loans to choose from, and the application and approval process is more complex than that of a traditional mortgage. Since you close both your construction loan and your final mortgage at the same time, you have the peace of mind of knowing your rate and, best of all, you only pay a series of closing costs. Once you find a VA construction loan provider, you'll need to comply with a very strict set of guidelines and rules regarding the property and the finished building to comply with VA regulations and property requirements. A permanent construction loan goes from being an exclusive construction loan to a traditional mortgage once the house is built.
If you don't pay a construction loan, reclaiming property from the construction site, rather than a finished home, isn't ideal for the lender. A construction loan is short-term financing that can be used to cover the costs associated with building a home, from start to finish. Fortunately, construction loans provide the funds needed to purchase land and pay for the materials and labor needed to build a new home.