Are you looking at building a home? If the idea of building your own home excites you, the first thing you need to do is familiarize yourself with the types of construction loans available in today’s market. Learning the basics of a construction loan will prepare you when it’s time to decide to build your own home.
A Conventional Construction-to-Permanent mortgage is mainly used to finance the building of the borrower’s home and permanent mortgage all into one individual transaction with a single closing. The borrower is going to be approved for a standard Construction-to-Permanent mortgage if the borrower is already qualified for a long-term permanent conventional mortgage. Upon conclusion of construction, the borrower is going to be expected to convert from the interim construction loan right into a permanent standard fixed-rate loan. There’ll be no other closing or even closing costs required.
Type of Construction Loans
There are two basic types of construction loans: (1) Construction-to-permanent, and (2) Stand-alone construction, respectively. Each one has its advantages and disadvantages, highly dependent on the borrower.
- Construction-to-permanent – Often referred to as the “one-time-close” or the “single-close” construction loan program. It combines the cost to purchase the land and construction cost in one loan. It’s two separate loans consolidated into one loan. A borrower qualifies for a long-term mortgage only once. They get interim financing during the construction phase, and the lender converts the loan balance to a permanent mortgage after completion of the house or after they sign the certificate of occupancy.
During the construction stage, the borrower only pays the interest on the loan. The construction-to-permanent loan is made directly to the borrower, a consumer-direct loan. They receive a monthly statement for the interest payment due for the given month. They have twelve (12) months to build and complete the construction from the date of closing and funding.
- Stand-alone construction – This is the standard type of loan a typical borrower gets. It’s a two-time close instead of a one-time close program. A borrower will have two (2) sets of fees for two closings – the first is for the construction part, the second is the permanent mortgage. The borrower cannot lock the mortgage rate ahead of time. If the interest rate goes up during the construction period, the borrower may pay a higher-than-expected interest rate for the permanent loan after completion of the home construction.
Construction Loan Limitations
Core Lending, a division of Goldwater Bank, N.A. – a national construction lender extending conforming construction loans throughout the country, only requires 5% down payment for a conventional construction loan.
The borrower can use the equity on the land instead of the down payment requirement. There is a 12-month seasoning requirement; if the borrower owned the land for at least 12 months, they could use the appraised value of the property to satisfy the 5% down payment stipulation. However, if the borrower doesn’t meet the seasoning requirement, the lesser of the full acquisition cost vs. the actual land appraised value will be used. A gifted land to the borrower from an immediate family member is allowed.
A conventional construction one-time close can be either a primary residence or a second home. Investment properties are not allowed. The loan amounts up to the conventional conforming and high-balance loan limits are observed. If you live in a state like New York or Hawaii, where the conforming loan limits are higher and considered a “high-balance loan limit” state, you can still avail of the single-close construction loan program offered by Goldwater Bank.
Draws and Inspections
The lender allows the builder to take “draws” in stages after routine inspections are made as the home is built. During this phase, the lender sends an inspector, field engineer, or appraiser, to determine if the builder completed a certain milestone. Only then are they allowed to take a draw to pay for materials and sub-contractors. The big part of the funding comes after completion of the home construction. If all goes well and the borrower is satisfied, the builder hands them the key and the new homeowner signs a certificate of occupancy.
Choosing a Builder
One of the most crucial aspects of building a home is finding the right home builder. It is imperative that you do your due diligence when looking for a builder. Check their credentials, local homebuilder associations, references, and previous projects. Find a builder that had previously built similar homes, styles, sizes, and price range that suits your needs and budget. The lender will scrutinize their credentials, their credit standings, financial situation, permits, and licenses, as well as their track record for building similar homes.
Advantages of a One-Time Close Construction Loan
Getting a single-close construction loan is beneficial to a borrower in several aspects:
- You only need to qualify once. If the borrower qualifies for long-term financing, they will be eligible for a one-time close construction loan. They don’t have to qualify again for the permanent funding after completion of the home construction.
- Reduces the risk for the borrower. Since borrowers don’t have to qualify twice, they significantly reduce the risk of “re-qualifying” again once the house construction has been completed.
- Fixed interest rate. The interest rate on a single-close construction loan can be locked a couple of months before the actual completion of the construction. The interest rate during the construction stage is pre-determined and will convert to a pre-determined rate when they close on the loan.
- Reduced closing costs. A one-time close construction loan only has one closing, so they don’t have to pay for second closing costs.
- Single appraisal requirement. Two-time close transactions require two separate appraisal reports, by two different appraisers, both paid by the borrower. A single-close construction loan only requires one appraisal before closing on the final loan.
- Avoid intervening liens. An intervening lien happens when the borrower gets a two-time close loan that does not convert to permanent financing and requires a second closing for the second loan. The recording of the second deed of trust to pay off the construction loan will be present. Typically, this happens when the borrower disputes with the builder about the quality of craft. The final payment is withheld, and the subcontractor doesn’t get paid. In return, the subcontractor files a “mechanics lien,” which is an intervening lien.
How you finance the construction of your new home will play a significant role in whether you’ll be pleased with the whole process or entirely stressed-out. Let us take the stress out of building your dream home. Our one-time close construction loan is the best in the industry and not offered elsewhere, not by any other lender in the country. It is our specialty product, take advantage of it.
For more information about the conventional-conforming one-time close construction loan, with a 95% loan-to-value (LTV), call us at (866) 772-3802 or use the tools on this website to get started.