What type of loan (construction/personal/etc.)?

Question

I'm a bit confused as to what type of loan I should be looking for.

The project:  I'm purchasing a small plot of land, building a home on it (I already have a contractor lined up and he's given me a bid), and then selling the home.

Should I be looking for a construction loan?  A business loan?  A standard mortgage loan?  A personal loan?

What are the advantages/disadvantages of each of these different types of loans?

Thank you for any replies.

Jim & Michele Wilcox · Answer

Just one word of caution. Talk to a mortgage broker about your project. There are some problems with private individuals buying land, building and then selling - called a spec home. There may be some legal or tax issues there. Who is going to live in the new dwelling is of concern to a bank especially if you are a private person and not a construction or investment company. They don't like to trust people who have never built new construction or have any building experience - even with a competent builder.

What you need to get is a construction loan that wraps your property (if not owned) and buiding costs all in one package. You can also put your interest payment (carrying costs) into the loan too. So you won't need to put out one penny until the project is finished. You'll need to get appraisals to satisfy the bank as well.

Do your research and talk to lots of people about how to do this correctly. It is not an easy thing to do - although everyone seems to think they are builders these days.

Jim Gordon · Answer

It sounds to me like you need a construction loan but talk to a mortgage professional. A construction loan is set to a dollar limit and the builder takes draws as the work progresses. That way you do not incurr all the debt to build the house at one time and normally they convert to a traditional mortgage when you get your OP.

Ryan Webber · Answer

You will initially need an interim loan for the actual construction phase.  After you are done with construction then you will refinance into a normal mortgage.