Q: What’s the difference between a construction loan and a conventional mortgage?

Filed in Home Experts by on December 9, 2014

mortgageA: “A construction loan is used to build a home or complete a significant remodel and/or addition,” says Chris Marvel of American Federal Bank in Fergus Falls, “It is typically a line of credit controlled by the bank. The borrower submits bills to the bank for payment. Payment is issued directly to the contractor and a lien waiver is collected as verification that the contractor has been paid. During the process, the bank monitors progress to a make sure the project stays on budget and the borrower has enough funds to complete the home. The normal term for a construction loan is six to twelve months. The borrower makes monthly interest payments for the term of the loan.”


“A conventional mortgage is a type of mortgage that meets the criteria of Fannie Mae and Freddie Mac. It is not insured or guaranteed by any government agency. The normal term for a conventional mortgage is 15, 20, or 30 years and rate can be fixed, adjustable, or fixed for a period of time then converting to adjustable. Funds from a conventional loan are used to purchase a home, refinance an existing mortgage (or mortgages), or to payoff a construction loan.“


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