Before you take out a construction loan, make sure that you know what you are about to sign for. Now that you have a dream house in mind, make sure that you are aware that one false move can turn your dream house into a real estate nightmare. Home Construction loan – what is it? Construction loan is also known as a self-build loan. This is usually short term loans that is intended for home building or a real estate project. Usually, these loans are taken out prior to getting long-term loans. Construction loans have a higher interest rate as compared to other mortgage loans because this kind of loan is considered relatively risky. Construction loan – how does it work? If you are building your home and you have an immediate need you can take out a construction loan that is usually payable for a year. When you complete your housing project, you can then apply for a mortgage loan that you can use to repay the short term construction loan. It is not uncommon to be required to pay off construction loans in full once the project is done. Bear in mind that the borrowed may not be able to receive the cash personally as some lenders would release the construction loan funds to the builder directly. This is to ensure that the money intended for the building is going to be spent on the project. The release of the money may be in increments depending on how the project is progressing. Construction loan considerations A challenge that a borrower may face when taking out a construction loan is the down payment. Be prepared to pay 20% – 25% of the loan that you need. Understandably, a house that is unfinished will not be worth much, so using it as collateral may pose a challenge. All is not lost though as the lender will take their chance on you if you prepare a comprehensive list of the details that you need during construction. Others call this a “blue book”. It will also help if the builder you hire is qualified and has made a name for himself already. Do not be afraid to take your chances, who knows, your dream home may just be a construction loan away.