Different builders can require different types of loans. Typically, a smaller custom builder will require a construction loan and a large commercial builder will allow end loans. Construction loans are closed on before construction begins, whereas end loans close when you move into your home.
Construction loans are loans taken out by the home owner to finance the builder to construct your new home. They provide homeowners small amounts of money, or draws, to pay the builder throughout different stages of the home building process. Construction loans begin collecting interest from day one. As long as you and the builder are timely and moving forward with the home, these loans can end up being effective. If the builder goes out of business, you could be left with a partially finished home, liens on the home from unpaid trades, and a loan you are still paying interest for. It is essential to ensure your builder is financially stable and reputable.
End loans, on the other hand, do not begin until you close on your home and receive the keys. With end loans, the builder actually finances the construction process until the home is complete. Beyond the earnest money deposit at the signing of the contract, the builder does not typically collect any funds from the buyer until the completion of the home. Delays in the completion of the home will be incurred by the builder. End loans usually also have fewer closing costs than construction loans, but you may not be able to lock an interest rate until you approach the close on your home. The average time frame for a buyer to lock rates on end loans is between 30 to 60 days. There are options to extend your rate locks farther out for a fee.
By: Damien Baden