There are several types of residential construction loans to choose from. If you choose the owner builder loan, this means you are acting as the general contractor and you are solely responsible for the construction getting completed on time and within budget. A custom contractor loan has the contractor being responsible for making sure that the construction gets done. A remodel or addition loan is for when you love your home and your neighborhood and don't want to move but need more space. This loan takes into account how much the house will be worth after the addition or remodel. There is also a tract or subdivision loan, which is the kind of loan you will need if you decide to build a house in a subdivision, choosing from the builder's standard house plans and adding any upgrades you want.

When you think about building a home, you have to figure out how much it is going to cost you. You take the cost of the building site, (keeping in mind that this includes both the asking price of the site and the costs to develop it), your home design, the construction costs (this must include quotes for all the subcontractors who will be working on your house, for example, masonry, electrical, landscaping, etc.)

It is always a good idea to pre-qualify for a construction loan. The process to pre-qualify takes into consideration your credit record, any down payment you can make, the type of loan you want, and the current market value of homes. If you pre-qualify, you will know up front the amount of home you can afford to finance and build.

Not all residential construction loans are alike. Many are based on a six-month or one year plan, which means they will be completed within that time frame. Some allow you to lock in your interest rate at the lowest rate, and others are variable interest rate loans, which means the interest rate changes with the market. Other loans are bridge loans, which allow you to use equity from your current home until your new one is finished. Many require interest only payments until the house is completed; at which point those payments are due. The best choice is to get a construction loan that can be converted into a mortgage loan so that you only have to fill out one application and have the costs associated with one closing instead of two.

Building a new home does not have to be scary if you do your homework, plan well, and realize that not everything will go according to the plan.
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