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If you’ve been shopping around for a new home for an extended period, you’re probably aware of the limited options available on the market. You want a new home, but you don’t want to finance something that doesn’t match what you want.

Likely, you’ve thought about the possibilities of having your own home built from scratch. If so, construction loans might be the option for you.

What Is A Construction Loan?

A construction loan is, as the name suggests, a loan that covers the cost of having a home built. It includes homebuilding expenses like builder plans, lot purchasing, and construction costs. With these types of loans, an aspiring homeowner can have the perfect home built from the ground up.

After applying and being pre-approved for a construction loan, the future homeowner would then initiate the process of having the home built. Each situation is different, but the process looks similar to the following:

  1. The homebuyer seeks an architect to develop the house plans.
  2. The homebuyer purchases a plot of land on which the home will be constructed.
  3. The contractor begins planning the construction project.
  4. The loan is granted to the homebuyer and a term is placed on the length of the construction project (usually between 6 months and 1 year).
  5. Construction begins and the home is built.

Different Types of Construction Loans

Depending on the homebuyer’s financial situation, one of the following construction loan types will be more appropriate than others. These five types of construction loans differ in terms and qualifications.

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