Construction loans are story loans. That means that the lender has to know the story behind the planned construction before they’re willing to loan you money. Because it’s a story loan, it’s not going to be standardized like mortgage loans underwritten to FHA, Freddie Mac or Fannie Mae guidelines. That said, there are some common features to a construction loan. Construction loans typically require interest-only payments during construction and become due upon completion unless it is a construction/renovation to permanent loan. Completion for homeowners means that the house has its certificate of occupancy.
Construction loans are usually variable-rate loans priced at a spread to the prime rate or some other short-term interest rate except for Owner Occupied Construct to Perm loans. You, the contractor and the lender establish a draw schedule based on stages of construction, and interest is charged on the amount of money disbursed to date.
