 TITLE: How Do Home Construction Loans Work? CONTENT: What Is a Home Construction Loan?\n---------------------------------\nA home construction loan enables you to pay the costs associated with building a home and to buy the land for the home. The builder, not the borrower, usually receives the money through several advances paid throughout the construction process.\nWhile the home is being built, the only payments you must make go toward the interest. Full payments of the home construction loan start six to 24 months after you take out the loan.\nA home construction loan typically carries stiffer requirements than a traditional mortgage loan. Why? Because when you buy a home, the lender can seize the property as collateral if you fall behind on payments. But if you take out a home construction loan, there's no collateral to take possession of until the home is built. Therefore, a lender assumes more risk when it signs off on a home construction loan.\nRequirements for a home construction loan may include:\n*   Solid credit score.\n*   20% down payment.\n*   Substantial amount of savings.\n*   Low debt-to-income ratio. This compares your monthly debt obligations with the amount of money you earn.\n*   Signed contract with licensed builder.\n*   Detailed construction plans. The lender may ask for information factors such as the home size, the lot size and the construction materials.\nOnce the term of the home construction loan ends (normally after 12 months), you must either pay off the entire balance or obtain a traditional mortgage to cover the balance. A mortgage usually comes with a 15-year or 30-year payoff period. END