A timely loan can help you raise money to build your dream home. During the process of constructing and renovating your home, you may need to apply for multiple loans. You may need a loan for construction and afterwards, you may need another loan to make further improvements. Wouldn’t it be better if different loans can be combined into a single loan? This is called construction-to-permanent financing/loan or one-time close loan.
Before proceeding, let’s quickly understand some concepts.
What is a construction loan?
You avail this type of financing when you need to construct a home from scratch. It is also called “self-build” loan. This must be a single-family home and must not be a part of another structure.
A construction loan can be used to buy the land as well as construction material, and also pay for construction works. Not just home, you can avail a construction loan even for other buildings.
A construction loan lasts till the construction goes on. In some instances, the lender may pay the funds directly to the contractors instead of the buyer. The payments are made in instalments as the construction progresses.
What is mortgage loan?
This is also called mortgage financing. This is a long-term loan that you get against the security of your home that you have built so far. You get this loan based on the value of your constructed home or building. You may take mortgage financing to carry on the construction or renovation work or add more to what you have already built.
Mortgage loan is usually long-term – 5-30 years.
What is construction-to-permanent financing?
This is a combined loan that saves you from the hassle of requalifying and getting an appraisal again. Both your construction and mortgage loans are combined in a single loan. It is also called one-time close loan or even single-close loan. Since a construction-to-permanent loan is closed before the construction begins, requalifying is not required, and you never have to spend money on another closing. Your construction loan is automatically transferred to the mortgage loan as you move into the newly constructed property.
Construction-to-permanent loans are available under FHA, VA and USDA. Under FHA, you can get maximum financing up to 96.5%, under VA & USDA 100%.
What types of real estate properties qualify for construction-to-permanent financing?
There are some pre-conditions that enable you to avail a construction-to-permanent loan. They include
- The property must be owned and occupied by the applicant.
- The property must be a one-unit home.
- The property in consideration must not be a second home or an investment property.
- It should not be a multiunit home and it should be for a single family.
- It should not be for condominium.
It isn’t necessary that your loan must also include the purchase of the land on which you plan to build. Of course, with the help of the loan you can purchase the land from a builder or a retailer or any third party. You can also receive the land as gift. You may already own the land. In fact, if you own the land, land’s equity can be used as your down payment.
To qualify for the loan, you must work with a builder or a retailer who can act as a general contractor or a construction coordinator. He or she should be responsible for the completion of your home. Self-construction projects don’t qualify for a construction-to-permanent financing. You will also need to show your insurance papers.
The down payment is used to make the payment to the construction coordinator. Till that money is completely consumed, you don’t need to draw money from your loan, which also means that you don’t need to pay interest on that. You draw money only when you need it.
What are the benefits of opting for construction-to-permanent financing?
One of the biggest benefits of availing a construction-to-permanent loan is that you don’t have to go through the same process multiple times. In usual circumstances, you first get a construction loan and once your construction is done, you get the mortgage loan. For the mortgage loan, you again need to go through the entire process. This costs you money. It also wastes a lot of time. Sometimes there are technical problems that can even prevent you from getting your mortgage loan.
When you go for one-time closing you get the loan just once, before you even purchase the piece of land upon which you want to build your home, and when the construction is completed, the loan is automatically converted into a mortgage.
You don’t need to draw the entire amount. You can use only the amount that you require to purchase the land and then construct your home.
Depending on the type of one-time close availed by the house owner, the builder or the retailer can draw according to the budget established by the builder. The builder can also choose not to draw any money until the construction is completed and then draw the entire amount that has been spent in lump-sum.
Whether the contractor goes for draw or no draw, at closing, the land seller will be paid in the beginning itself.
An inspection is carried out to ensure that the construction has been completed
The construction loan period can last up to 1-2 years. Consequently, your payments are going to be low during this period. Also, such an arrangement comes handy when your construction is taking longer than expected. Remember that your construction loan turns into mortgage loan only when you start living in your home and a supervisor from the bank or the loan agency confirms that.
You also get a fixed rate. The benefit of getting a fixed rate is that you are not affected by the fluctuations in the financial market.
The following are the administration fees that you may be required to pay
- Construction administration fee.
- Construction underwriting fee.
- Construction closing coordination fee.
- Interim construction interest.
- Inspection fee (depends on the number of inspections).
- Draw fees (depends on the number of draws).
The construction administration fee is paid by the builder.
Some precautions that you can take
To qualify for the construction-to-permanent loan your property must be owner occupied – you must be the primary resident of the property. Additionally, the property must be one unit, built for a single family. It should not be an extension of an existing property. The loan conditions also require you to work with a approved licensed general contractor.
It is advised that you know your upfront cost when you apply for your construction-to-permanent finance. You will need to make a down payment and the amount of the down payment depends on the money you are loaning. There is also closing cost which can be around 3%-5% of your loan amount.
Make sure you have got all the papers. You will need a construction agreement from your builder. You will also need to present your land contract. If needed, you will require the deed of the lot. A floor plan can further enhance your prospects.