New home construction loans are used by borrowers when choosing to build a new house. With this type of lending program, financial agreements are designed differently than standardized agreements. A new home construction loan is designed for the unique needs of builders, whether the individual is a licensed contractor or buyer in the market for a newly designed house.
New home construction loans allow interest-only payments during the building process with the amount coming due or rolled into a mortgage payment upon the building's completion. If the individual has arranged for the agreement to be construction-to-permanent financing, then there is only one application and one closing which will save a great deal of time. Completion of the agreement will be based upon the legal issue of a certificate of occupancy.
These financial packages are usually based on variable rate loans which allow for the funds to be dispersed on a "draw schedule" basis, according to the stages of construction and the needs of the buyer, contractor and/or the lender. The consumer can also lock in a certain rate on the new home loans during the building process, but rate locks are only effective for 30-60 days.
If the individual has locked in a loan rate for a new home construction loan and they see that rates decrease during construction, then they will be relieved if the original agreement includes a float-down feature that allows a reduction in the rates, even if this can only be done once. Float-down features may require the consumer to select higher rate agreements, but they are also a safeguard, especially if the rate lock is going to affect the building process.
source : http://www.christianet.com/homeloans/newhomeconstructionloans.htm
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