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If you are planning to build your own home in 2006 you are in luck. More lenders are offering construction financing packages that can make building your dream house a reality. Construction financing is for someone who wishes to add on to their existing home or purchase a building lot and hire a general contractor to build the house.

There are generally two ways to finance new construction: The most common way involves getting a short-term construction loan. After completing the construction a permanent loan is obtained using traditional lenders at competitive rates. Some lenders are now offering a new option, which combines a construction loan with the permanent financing in one package. This type of loan sometimes can include the purchase of the land as part of the total cost.

Some common questions about construction financing are:

How does a construction loan work?
Construction loans allow homeowners to borrow funds based on the estimated value of the house when it is finished as opposed to the value of the house today.

How are funds accessed during construction?
After your closing / settlement on your construction loan, an account is established for you from which you may draw according to an agreed upon schedule that has been submitted by your builder and approved by the lender. At each phase an inspector will confirm that the scheduled work has been completed and a construction draw payment will be authorized.

How much may I borrow?
Generally, the total amount of the loan cannot exceed 80% of the combined value or cost of the land and the completed structure. Most construction loans require a minimum of 20% down payment.

How do you pay interest during construction?
Interest-only monthly payments are made during the construction period on disbursed dollars for work completed. You will not begin paying interest on the total amount until the final payment has been disbursed.

Must I have a general contractor?
To assure that all work will be completed in a professional manner on a timely basis, most lenders require that you retain the services of a general contractor. They also reserve the right to approve your choice of builder to assure that his experience and financial stability meet the lenders standards.

What if I need financing to purchase the land?
Providing the construction begins within 30 days, some lenders will finance the purchase of the land.

If I already own property, may I use its value as equity toward my down payment?
Yes. The value of the lot may be used to determine the total equity that is available for a down payment.

Will I need to have another closing/settlement when construction is completed?
Not if you choose a construction to permanent type loan. These loans have only one closing / settlement and there are no additional fees required at the time you convert your construction loan to a permanent mortgage.

What about special situations such as financing for modular homes or raw land?
Many lenders today offer financing packages tailored to meet your individual needs. Modular homes and land loans are eligible for construction financing.

Are jumbo loans available?
Jumbo loans up to $2,000,000 are available for those who qualify.

So whether you are planning to construct a new home or a purchase and reconstruct an existing home, many options for financing are available today at reasonable rates.