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How does a mortgage loan differ from a construction loan?

A major difference between a regular mortgage loan and a construction loan is the need for plans and specs of the house you plan to build. Plans are the building blueprint or drawing of the house; specs are the cost breakdown for its construction. For example, how much will the foundation cost? It is important to obtain the plans and specs as soon as possible in the construction loan process because your lender needs to give this information to an appraiser to determine the "as-completed" value of the house to be built.

A second difference is the way the money is disbursed. With a mortgage, funds are disbursed all at once when the mortgage is approved and the homeowner is ready to move in. In the case of a construction loan, the loan is approved before construction begins, and the money is disbursed in phases as construction progresses. Interest is only charged on the amount disbursed.

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