Construction loans are a specific type of loan that allow the cost of construction to be financed through your mortgage. You can finance a full “ground up” construction or you can finance renovations for an existing property.

The loan is not provided in one lump sum, but rather the funds are released in stages as construction is complete. The borrower, mortgage company, and construction company will all work hand in hand throughout the process. A 4th entity, a risk evaluation company, may also be involved in the lending process.

In order to qualify for this type of financing, you will need to provide more documentation that a standard conventional loan. Some extra documentation you may be required to provide are proof that you own the land the property that is being built on, an engineer approved building plan, a construction budget and timeline, as well as a proposed payment schedule for the contractor to receive the funds.

An FHA 203K is a type of renovation loan that requires as little as 3.5% down payment. This is a great option for those looking to add value to their home without putting a lot of money out of pocket. If the total renovation cost is greater than $35,000, you may be required to hire an additional consultant from the US Department of Housing and Urban Development to oversee the renovation process.