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How to Get a Home Construction Loan

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If you are going to build a new home or remodeling an existing home, then you will need a home construction loan. You can obtain this type of loan through banks, credit unions, and mortgage companies although not every lender offers them.

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New home construction loans have higher interest rates than the conventional mortgage because the asset is not yet built and so the risks are higher. Learn more about mortgage discount points,  go here. 

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In the new home construction loan, money is disbursed based on construction schedule agreed upon by the homeowner, the contractor and the lender. These disbursements are paid when each phase of the home construction is completed. If the homeowner takes out the loan, he is responsible for paying the contractors. Before releasing the money, the lender would verify if the work phase is completed.

There are two types of home construction loan including the construction only and the all-in-one. These are both short terms ranging from 6 months to a year and is limited to 90% of the construction costs. Either the borrowers puts up the 10 percent in the form of a cash down payment, or uses the land or equity built up in the current home as collateral. Find out for further details on what is a reverse mortgage right here. 

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The interest rate of the construction-only loan varies. When the construction of the house is completed the borrower is required to pay the entire amount, so the loan is converted to a conventional mortgage or placed under another loan. 

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In construction-only loan, you are very flexible since you can increase the amount borrowed during construction. You also have time to shop around and decide which lender you want to go with long term. The downside to this is the high interest rate and two sets of closing costs and a potential rise in interest rates between the two loans.

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The all-in-one loan works as a construction loan but once the construction is completed it automatically becomes a mortgage. This has only one set of closing costs, less paperwork and one interest rate. If the interest rates go down, you need to pay the higher one since you are locked into it. You cannot also increase your loan so if the loan is not enough, the you need to apply for another loan. Take a  look at this link https://www.ehow.com/facts_6912898_umbrella-mortgage_.html  for more information. 

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If you are applying for a loan, they look on your ability to repay the loan and your credit report. Your credit report will show past delinquencies so before applying for a loan, make sure that these are corrected.

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