Construction can famously be a costly endeavor. Though there are ways to fund construction projects yourself, often, the best route for construction funding is through a construction loan.

A construction loan can be used for a number of purposes, including renovation, development and construction. But, most of the time a construction loan is used to finance the building of a residential home or real estate project from the ground up. Typically, it is a short-term loan that is issued in installments and is intended to be repaid within a period of 18 months or less.

A construction loan can also be used for a renovation or restoration project, but it is not usually advised. For one, construction loans can be difficult to qualify for. Furthermore, they can be paperwork heavy and may require you to refinance your current mortgage to more undesirable rates. Because construction loan rates are typically quite high, you may not want to forgo your residential home loan rates for residential construction loan rates.

A residential construction loan can be the fastest way to pay your contractor to build your dream home. The amount of funds depends on the scope of the project and estimated value of the future home. A construction loan can pay for up to 90% of the total cost of the project. For example, if the appraised value of the future home is $500,000, you can get up to $400,000 in residential construction loan financing.

Construction loans can be issued with variable interest rates that change over time or fixed interest rates. Though there can be advantages of variable interest rates, fixed-rates are sometimes preferable as they are consistent and easier to budget for. If you get a good rate, be sure to lock it in.

A benefit of a construction loan is that you do not make payments on the principal immediately. Instead, you only make interest payments while the project is being completed. And, you only pay interest on the money that you have been issued, as you receive installments.

Unlike typical residential home loans or a residential hard money loan that uses the home as collateral for the mortgage, a construction loan is an unsecured loan. A construction loan is not issued based on the completed home as collateral. This means that you will be charged high interest rates and a large down payment. Construction loan rates are usually much higher than current residential mortgage rates.

Moreover, you cannot take out a construction loan to build the home yourself— you must find a contractor or builder. The lender will pay the contractor or builder directly in installment payments throughout the construction process. The money is not issued in a lump sum. Instead, as each draw period comes to a close, an inspector will come to survey the project and judge whether more money can be issued.

It’s possible to convert the construction loan into a typical residential home mortgage after the project is completed. The mortgage is a standard 15-30 year loan. Once the home is move-in ready, you can begin with making your primary residential mortgage payments. This can be advantageous because it allows you to save money on fees and closing costs.

While a construction loan can be used for renovation, it is often recommended to apply for a home renovation loan instead. Depending on the scope of a renovation project, you don’t even need a renovation loan. Renovations under $25,000 can be financed with a credit card or a personal loan. Moreover, you can use equity in your home or even a line of credit for a more affordable loan.

One of the best ways to afford a construction loan is through the government, specifically through the FHA— Federal Housing Administration. The FHA offers subsidized construction loans with lower interest rates and smaller down payments between 3.5-10%. Furthermore, the FHA has more lenient credit score requirements. You can get approved even with a credit score as low as 580.

In addition to the government, there are plenty of other lenders that issue construction loans. Banks, credit unions and home mortgage companies can provide a range of construction loans. Some of the most reputable lenders include Wells Fargo, Valley Bank, Garden State Home Loans and U.S Bank. Be sure to research the individual requirements of every lender.