Who is eligible for such a loan? Since it goes in the field of unsecured personal loans, people do not need too much documentation for it. Basically, a borrower has to be of legal age (at least 18, but some financial institutions might ask for 21 years), he has to prove that he has a solid and regular income, and finally he has to provide the exact amount of money he needs to build or expand his house. For this last requirement, the bank might ask for detailed plans made by an architect and the costs of materials, but this happens only rarely, since the bank is interested mostly in the final amount of the loan and that the borrower will be able to repay the loan when the construction is complete. Basically this loan type is an unsecured loan, but if the person owns the land, it can be considered as equity on the loan, and in this case the borrower will pay a lower interest rate. It is important to note that this loan type is a short term loan, so the interest rates can be high sometimes, which is why it’s worth it to put the land as collateral if the person takes the loan for a somewhat longer period of time.

There are many different policies regarding this loan: the amount can be split over the different periods of construction, and so the interest rates will vary according to the amount of the loan. The usual policy is the following: during the construction the borrower will pay only the interest and when the construction is finished, the person will pay the loan back. People often pay only the interest during the construction, and they transform their loan into a mortgage after the building is finished.

Many financial institutions offer construction loans, and thus their offers vary a lot regarding the amount they lend and the interest rates. People should be careful and compare these offers before choosing one. There is a simple way to do that: most of these institutions have websites and a person can apply for free. The company will send their answer within a short period of time, and the potential borrower can easily compare the offers and choose the best one. Since the interest rates are usually quite high, people should pay attention and take this loan for what it is: a short term loan, otherwise they will have to pay back too much money to the lending institution. As a general rule for every loan: the borrower should pay attention to the term of the loan and the interest rate, these are the things which make a difference between a good and a bad (construction) loan.