Banks typically finance new-home construction with a construction-to-permanent loan that buyers treat like a line of credit, making draws on the loan as the builder finishes various parts of the house. Once construction is complete, the loan converts to a regular mortgage, Bankrate explains.
When buyers take a construction-to-permanent loan, they save money by paying only one set of closing costs. On the downside, buyers must lock in their loan rate early in the construction process, which means they can lose a good rate if construction takes too long. Because banks have little collateral during the construction phase, they often require buyers to contribute at least 20 percent of the cost, Bankrate notes.