Construction loans are available to borrowers who would rather build a new home than purchase an existing one. These types of loans differ from FHA-insured 203(k) Rehab Loans in that this type covers the cost of the construction only, rather than the cost of purchasing an existing home + the cost of renovations. In most cases, a general contractor handles the heavy lifting (no pun intended) of the building process. However, some lenders may offer an “owner/builder” construction loan for those borrowers who are managing the building process themselves. In this case, a lender will likely require proof of licensing and education and/or experience in home building, among other requirements.
While construction loans are intended to finance only the cost of building, some lenders also may offer a construction-to-permanent option, in which a construction loan is converted to a traditional mortgage after construction is completed. Often, borrowers will make interest-only payments, but will end up being more expensive over the life of the loan. Make sure to shop around for the best rates available if you’re considering this option.