When deciding to build a new home, you need to be familiar with the available types of construction loans in the modern market. Learning about these construction loans from Colorado Mortgage Pros will prepare you when you decide to construct your own home. Conventional construction-to-permanent mortgage, for example, is used in financing the construction of the borrower’s house and a permanent mortgage in one transaction with one closing. One will be approved for this standard construction-to-permanent mortgage if he or she is already qualified for a long-term and permanent traditional mortgage. Furthermore, on finishing the construction, the borrower will be expected to change from the short-term construction loan to a permanent standard fixed-rate loan. There will be no other closing costs involved.
Types of Construction Loans
There are two types of construction loans, namely; Construction-to-permanent and Stand-alone construction. Each of these types has benefits and demerits based on the borrower.
This is commonly known as the one-time-close or the single-close construction loan. The construction-to-permanent loan includes the cost of purchasing land and the construction cost in a single loan. Basically, it includes two loans that are joined into one. A borrower will only qualify for this loan once and will get interim financing during the phase of construction. The lender will then convert the balance of the loan into a permanent mortgage once the house is completed or when the certificate of occupancy is signed. When the home is being constructed, the borrower will only pay the loan’s interest. The borrower will receive the loan directly and will have a year to build and finish the construction from the closing and funding date.
This is the fundamental loan a borrower gets. It is usually a two-time close instead of the one-time loan. In this type, the borrower will get two sets of funds for two closings. These are the construction section and the permanent mortgage. The borrower cannot lock the mortgage ahead of time. This means that in case the rate of interest rises during the period of construction, the borrower could pay higher than normal rates of interest for the permanent loan after construction has been completed.
Construction Loan Limitations
There are numerous construction lenders around the country with the conventional construction loan requiring only 5% down payment. A borrower can also use land equity instead of the required down payment. A 12-month seasoning is required, and the borrower owned the land for at least a year, he or she can use the appraised property value in order to satisfy the five percent down payment requirement. In case the borrower does not meet the seasoning stipulation, the lesser of the full purchase cost vs. the actual land appraised value will be utilized. Land that is gifted from an immediate family member is not permissible. The conventional construction one-time close can either be a second or primary residence. The investment properties are not allowed, and loan amounts up to the conventional conforming and high-balance loan limits are considered. This means that if you live in a state like Hawaii or New York, where the conforming loan limits are higher and considered ‘high-balance loan limits’ states, you can still get the single-close construction loan.
Draws and Inspections
The lender permits the builder typically to take ‘draws’ in phases after the routine inspections are made when the home is being built. During this stage, the lender will send inspectors, appraisers, or field engineers to find out whether the builder has completed specific steps. It is only then that they will be allowed to take draws to purchase materials and pay subcontractors. The vast funding comes right after the home construction has been completed. Once the borrower is satisfied, the builder will forward the keys to the new homeowner who will sign an occupancy certificate.
Choosing a Builder
One of the most vital parts of building a home is selecting the right home builder. It is essential that you be very careful and takes time to look for a builder. Confirm the credentials, references, previous projects, and local homebuilder associations. Previous experience is important and always goes for builders who have built similar homes to what you want in terms of budget, style, size, and so on. The lender will assist in scrutinizing the builder’s credentials, financial situation, credit standings, licenses, track record, and their permits.
Advantages of a One-Time Close Construction
- Fixed interest rate: The interest rate can be locked a few months before the completion of the home. The rate of interest during the construction phase is pre-determined and will change after the close on loan.
- Reduces the borrower’s risk: Because borrowers do not have to qualify twice, they will reduce the re-qualifying risk once the construction has completed.
- You only need to qualify once: Borrowers will be eligible for a one-time close construction loan if they are eligible for long-term financing. Borrowers do not have to qualify again for the permanent funding after completion.
- Single appraisal requirement: In a two-time close transaction, two separate appraisal reports from different appraisals both paid by the borrower are a must. A single-close loan will only require one appraisal before the closing on the final loan.
- Reduced closing costs: This type of loan has only one closing. This implies that borrowers do not have to pay for the second closing costs.
- Avoid intervening liens: An intervening lien occurs when the borrower gets a two-time close loan which does not convert to permanent financing and needs a second closing for the second loan. The recording of the second deed of trust to pay off the construction loan will be present. Basically, this will happen when the borrower disputes with the builder about the quality of the craft. The final payment will be withheld, and the subcontractor will not get paid. In return, the subcontractor will file a mechanics lien which is an intervening lien.
How you will finance the construction of the new home will play a vital role in the entire process and the final results. By working with Colorado Mortgage Pros, we will take the stress out of building your dream home. Our one-time close construction loan in Colorado is the best industry, and you should take advantage of it now.