These loans are generally used by home builders or by people who want to finance the construction of their own new homes.
Construction loans are essentially specialty short-term loans, where the borrower can refinance the loan into a mortgage after the construction has been completed to pay off the balance of the construction mortgage loan (which is sometimes called an “end loan”).
The approval process for a construction loan is a bit more detailed than some other credit options because it is specifically tailored to construction needs.
As such, applicants need to have building plans and a construction budget before they can be approved. After approval, construction loans are usually paid out in stages, as the project advances. Interest is paid only on the outstanding balance of the loan.
Terms and conditions will vary from case to case, as the borrower could be required to make interest payments on the loan while the construction project is underway or pay off the balance entirely once construction ends.
Lenders tend to require down payments for construction loans in the range of 25% to 30% of the lot purchase. Also, if a borrower has weak credit, they could have a hard time qualifying.