Home construction lending is a little different than regular mortgage financing.

• First, you will need a home construction line of credit that will used to pay subcontractors and suppliers who perform work and provide supplies.
  
  
• Second, at the end of the construction project, you will use a residential mortgage to pay off the construction line.
  
  These are the two parts to home construction financing:
  
  
  1. Home Construction Line
     
  2. Residential Mortgage

You will submit for lender approval an application for a home construction line of credit.

You will use the construction line to pay subcontractors and suppliers during the construction phase of the project. Generally, these players require payment within 30-60 days following work completion.

Once each month, or after each stage of the home construction

your builder will submit a request for funds to pay for subcontracting work and supplies that was used during the construction phase.

The lender will release funds after they have verified that the amount requested will be used for the construction phase that has been completed.

Typically, the lender will send out an inspector to verify that the work has been completed. If passed, funds will be released to line the next day.

Lenders normally require scheduled withdrawal amounts tied to each major phase of the construction.

If you request more draws than allowed per project, you may be charged a nominal fee per draw.

Don't underestimate your need for up front cash. You will normally spend more money during the first construction phase than what you can withdrawal up front.

You should maintain a cash reserve account for cost overruns during a construction phase. See our affiliated site for more information about using your home equity as a cash reserve account:

www.YourEquity.com

The construction line generally carries a higher interest rate than residential home mortgages.

You will need to apply for a residential mortgage to pay off the construction line when you finish the construction project.

In most cases, your approval for a residential mortgage will be required prior to obtaining the construction line.

The residential mortgage is like any other single-family home mortgage loans. These include conventional and non-conventional loans, fixed, adjustable rates, etc.

We have complete information on residential mortgages at our affiliate site: PickMyMortgage.com

Some lenders offer both construction lines and residential mortgages as one loan.

The Construction/Perm loan is a combined loan made directly by the lender to the borrower. It functions as a construction line for financing home construction; then it serves as a permanent mortgage by paying off the construction line after you complete the construction project.

The Construction/Perm loan has several advantages, namely:

• the borrower can save money by paying for only one set of closing costs, attorney's fees, appraisal and taxes
  
  
• since the construction line is contingent upon approval of residential mortgage, obtaining a construction/perm loan allows the borrower to submit and provide documentation for one loan application and work through one lending institution.
  
  
• because the loan is made directly to the homeowner, the borrower can take full tax advantage of the interest rate charges.

The Construction/Perm loan may also carry some disadvantages, namely:

• obtaining the best rate and terms. Some Construction/Perm loans carry higher than prevailing market rates.
  
  
• even though you may be working with one lender, usually the loan is managed by two separate departments. You may need to provide duplicate documentation.
  
  
• your best option is to shop around to determine your best options