What is the difference between a construction loan and a mortgage?

Beyond the cost and repayment timeline, construction loans and mortgages have a few main differences: The funds distribution: Unlike mortgages and home equity loans, which provide funds in a lump-sum payment, the lender pays out the money for a construction loan in stages as work on the new home progresses.

Do you need a contractor for a construction loan?

Construction loans require a licensed contractor or builder to carry out the construction phase (plans for the home and for the contractor must be confirmed and submitted before you can be approved for a loan). If you are not a licensed contractor, you cannot act as your own general contractor for the construction of your home.

How does a contractor get a mortgage?

When you apply for a mortgage as a contractor, the lender will carry out something called an affordability assessment based on the value of the property you want to buy and your monthly income and expenses. This helps them figure out if they’re happy to lend you money, how much they’re willing to lend, and at what interest rate.