A construction-perm loan will pay for construction of the home being built and will roll into your permanent loan. There are two options, a one-time or two-time close construction loan. One of the biggest benefits of the one-time close construction loan is the ability to lock in the interest rate during the construction process. In addition, you can save on time, documentation, and paperwork and closing costs. Once you close on the loan, you can focus on the building process without having to worry about submitting more documents along the way.
With a construction-perm loan, the financing is based on your cost to build and cost of or value of your lot. You can purchase the lot at the same time as signing a construction contract, or you can build on land that you are purchasing or land that you own free and clear.
The cost or value of the lot plus the cost of construction per your construction contract with the builder is call the “total acquisition” cost. Your loan is based of the total acquisition cost or appraised value, whichever is lower.
If you are applying for 95% financing, your required 5% down payment is based on the total acquisition cost or value.
The loan process is basically the same as any other mortgage loan. The income, assets and credit are evaluated to be sure the borrower meets the loan criteria. The appraisal is performed based on the plans, specifications of the build and the lot. Once the credit documents and appraisal are completed the loan is submitted for approval. Once the loan has final approval, the loan moves to closing.
Because the loan will close before construction begins, it is imperative that the costs are accurate. You cannot increase the loan amount later with a one-time close loan. (Prudent lenders will require the borrower retain some cash reserves, usually around ten percent. This cushion should be available in readily accessible cash in the event of change orders.) During the construction phase you may elect to make certain changes to your contract with the builder. These are called change orders. Anything that increases the cost of the build, will be adjusted by the builder in the form of a change order. (An agreement between you and the builder to make a change from the original contract that changes the cost of an item or items) An example might be borrower electing to purchase higher end appliances.
Closing occurs before any construction begins. At closing, you bring your funds for down payment, closing costs and prepaid items. You will pay for your first year of home insurance once the home is completed (out of pocket). The builder will carry a builder’s risk policy while the home is under construction.
The lender holds the funds for construction in a construction account.
The builder will request funds, also known as draws, throughout the construction phase. During the construction phase you will pay interest only on the amount of funds drawn on the loan.
Once the home is completed the builder will provide final documents and the lender will order a final inspection with a re-certification of value. No additional paperwork is required from the borrower at the end of a one-time close construction loan. The loan will “modify” to a permanent loan with the pre-determined fully amortizing payments based on the interest rate and term selected by the borrower. With a true one-time close, there is no second closing.
