Construction loans are completely different from those loans that are used to buy already existing homes. Mortgages used to purchase homes which are already constructed, use the home as collateral for payment of the loan. If you fail to make scheduled mortgage payments, then the bank takes ownership of the home and it will sell to get the amount of the loan.

With a new home construction loan, there will be no home to use as collateral because the home is still to be built. In that case, the bank will have your word as guarantee for payment of the loan. It would be good if banks could simply consider your word for it, but when hundreds of thousands of dollars are at stake, John Smith's signature isn't enough for the bank to simply hand over a check for you to begin construction.

Because of the nature of the home building process, the financing process concerning a new home construction loan is more stringent. Once the lender has accepted you to borrow a new home construction loan, a schedule will be outlined again.

In this draw schedule, the lender tells how the loan will be disbursed. Typically, new home construction loans are disbursed in twenty five percent increments. Twenty five percent of the loan amount will be given to you by lender,when you complete 25% of your construction. This is called a draw.

The lender requires an appraisal of the progress to ensure himself that said work has been completed. You need not make any payments on your new home construction loan until or unless the original disbursement has been made.

At that moment, only interest payments will be due on the loan and a good news is that you need to pay only for the portion of the loan that has been disbursed. The more you construct the more loan of your's is disbursed, your monthly payments will be increased and this will happen because each time you are paying interest on a huge amount of money when a disbursement is made.

Your entire balance of the new home construction loan will be due,when you complete your construction completely. Don't panic. You will have a way to pay this balance well in advance. ?How?, you ask? Before you make a approval for a new home construction loan, the lender will ask you first to approve for a mortgage.

To ensure mortgage approve, the new home construction lender will request a guarantee letter from the lender of your mortgage. Once construction is complete, the amount of the mortgage is used to pay you back the balance of the new home construction loan.

When you choose one-time closing, both the construction loan and the mortgage closes at the same time,and locking the interest rate for both loans. On the other hand, when you choose two-time closing the construction loan closes first, and then the mortgage closes when you complete your construction..