- These loans finance the building phase of a home but require full repayment upon completion, often necessitating a second loan (permanent mortgage) to pay off the construction loan. They typically have a term of one year or less.
- Construction-to-Permanent Loans (also known as “One-Time Close” or “All-in-One” Loans) –
- This type of loan covers both the construction phase and converts automatically to a permanent mortgage once construction is complete, avoiding the need for a second closing.
- One-Time Close Construction-to-Permanent Loan – Offers a single set of loan fees and allows you to lock in your permanent loan rate up-front for up to 24 months. It can be fixed for various terms like 5, 7, or 10 years or 30 years.
- Owner-Builder Loans –
- Specifically for homeowners who want to act as their own general contractor. These loans require the borrower to have a significant amount of construction experience or hire a licensed contractor as a project manager.
- Finished Value or “As Completed” Loans –
- Loan amounts are based on the anticipated value of the property once construction is completed, rather than the cost of construction itself. This can mean lower out-of-pocket expenses for the borrower during construction.
- Renovation Loans –
- While not strictly for new construction, these loans finance the rehabbing or significant remodeling of existing properties. They can be similar to construction loans in structure but focus on improvements rather than building from scratch.
- Land Loans –
- Not construction loans per se but often a precursor; these loans finance the purchase of land where construction will eventually take place. Some construction loans might include land acquisition in their terms.
- Jumbo Construction Loans –
- For higher-value properties, offering financing beyond conventional loan limits. These can be for both construction-only and construction-to-permanent scenarios, tailored for luxury or high-cost areas.
- Interest-Only Construction Loans –
- During the construction phase, you might only pay interest on the amount disbursed rather than the total loan amount, which can help manage cash flow during the building process.
- Customized Loan Programs –
- Some lenders offer tailored programs that might not fit neatly into one category, providing flexibility in terms, rates, or specific conditions based on the borrower’s needs or project specifics.
- Government-Backed Construction Loans –
- With more lenient approval criteria, these loans are insured by the Federal Housing Administration. They allow for construction financing with a low down payment (as low as 3.5%) and can convert to a permanent mortgage upon completion of construction. They’re particularly beneficial for first-time homebuyers or those with less-than-perfect credit.
- For eligible veterans, offering benefits like no down payment requirements for certain scenarios.
- These loans are backed by the U.S. Department of Agriculture and are designed for rural development. They allow for the construction of a new home with no down payment, provided the property is in a USDA-eligible rural area. These loans combine construction financing with permanent mortgage financing into one loan product with one closing. They require the construction to be completed within a specified timeframe (usually 12 months) and come with income limits and property location restrictions.
Each of these loan types serves different needs, from the flexibility of one-time close options to the specialized nature of owner-builder financing or the unique benefits provided by government-backed loans like those from FHA and USDA. Borrowers in California should consider their specific project requirements, financial situation, and long-term goals when choosing a construction loan type.