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Types of Construction Loans

By Tiffany Raiford

In Massachusetts, a construction loan is defined as any type of loan that is used to finance construction of any type on a home. They are often referred to as story loans. The reason for this is that lenders require a detailed explanation as to what you will do with your loan once it is in your bank account. There are several different types of construction loans available to borrowers who would rather build their dream home than purchase someone else's.

One Time Close Loan

A one time close loan is a type of construction loan that requires only one set of paperwork. It's sometimes referred to as a construction to permanent loan. It's a combination of both your construction loan and your permanent loan, which means you only need to close once rather than twice. Additionally, you won't need to pay two sets of closing costs. It's not easy to obtain a loan of this nature, but it can be done. For the most part, the loan term is 6 to 12 months, but many lenders will consider extending this term for special projects.

To obtain a one time construction loan, you will only need to qualify for funding one time rather than two. The funds are disbursed several times among the course of construction to the contractor based on the findings of the inspector who comes out to check on the progress each time an aspect of construction is complete. You will only make payments on the money that's been drawn to date, which means you will not make large payments until your home is complete.

Note Modification Loan

A note modification loan is fairly simple. A Massachusetts lender will provide you with the funds to build your home. The money from your loan is disbursed to your builder throughout the construction process. When you apply for the loan, you will receive two interest rates. One is for the construction process, as you will pay interest on your loan while your home is being built. The second is your mortgage interest rate. Your construction interest rate is set only for a specific time, so you must choose a number of months that is reasonable for completion of the construction process.

The modification portion of the loan comes into play when it's time to modify the loan from a construction loan to your mortgage. There are occasionally small fees associated with this, typically those that cover the cost of your escrow account and other little details. This is a simple process you can apply for at the bank in no time at all.

Two Close Construction Loan

This type of construction loan works very easily. You will first apply for a construction loan. You will pay interest on the amount of the loan during the building process. During this time, it is imperative that you maintain your excellent credit, because you will have to reapply and close a second time when it comes time to transfer your construction loan into your mortgage. This is done with a refinance. This loan is good for those who might not want to lock themselves into a specific amount prior to the completion of their home in case they decide to make changes, such as adding upgrades.

There are many different types of loans, and construction loans are no different. If you plan on building a home, it's imperative you understand the difference between the many different loan types. One might be perfect for you, but you don't want to figure that out after you've already applied for and received a different type of construction loan.

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