One-Time Close Construction Loans
Why is a One-Time Close Construction Loan Better for you?
When it comes to constructing your dream home, you will have a range of mortgage options available to obtain financing. The traditional approach involves obtaining "interim financing"from a bank or mortgage company to fund the construction phase followed by an additional closing to lock in your 30-year fixed mortgage rate and pay off your adjustable construction loan. This popular approach, commonly referred to as a “Two-Time Close” came with additional closing costs for borrowers.
While traditional construction methods have served us well for many years, it's important to recognize that times are changing. If you're seeking financing for a custom home build, it's worth examining the next generation of construction loan products before making any decisions.
The Secondary Mortgage market and the considerable shortage of housing inventory have been the key driving forces behind the surge in popularity of Single Close Construction to Permanent loans in recent years. Onshore Mortgages' Single-Close Construction to Permanent loan allows borrowers to close both the construction loan and their permanent fixed rate financing simultaneously. This type of loan is referred to as a "construction to perm," "single close," "all in one," or "one-time close construction loan."
What is a One-Time Close Construction Loan?
If you're looking to build your dream home in Massachusetts or Rhode Island that requires financing from the ground up, our single-close construction loan program may be the right option for you. With this mortgage loan, you can purchase the home's land, pay for construction and development costs, as well as cover the costs of fixtures and appliances with one closing. If you already own the land, its value will be used toward the combined loan-to-value and the construction loan will be done as a "refinance", paying off your existing land loan. This streamlined process allows you to close on your home loan once, rather than having to secure two or more separate mortgage loans for the property, construction, and permanent financing.
During the construction phase the borrower can enjoy a lower, fixed interest-only loan payment. The loan amount must be within your county loan limits and follow Fannie Mae and Freddie Mac guidelines, also known as a "Conventional" or a "Conforming" loan. The maximum permissible limit for a conforming loan varies by state and county and changes yearly. Find out the maximum Conforming loan amount in your area today!
What are the Advantages of a One-Time Close Construction Loan?
If you're interested in learning about the benefits of single-close construction to permanent loan, pay attention to these key points:
You only need to qualify once. Gathering all of the necessary qualification documents, like pay stubs, W2's, tax returns, bank statements, photo IDs, and signing loan disclosures, can be time-consuming and confusing. A traditional two-time close construction loan will require you to qualify twice (once for the construction loan, and again for the permanent 30-Year Fixed mortgage loan once the house is completed. In contrast, a single-close construction to permanent loan only requires you to go through the loan underwriting process one time.
Reduced risk for borrowers. In addition to convenience, the one-time qualification process serves as your risk management tool. With a two-time close transaction, there is an element of risk to the borrower because they must re-qualify for the final loan once the house is finished. If the borrower fails to qualify for any reason, they may be unable to pay off the construction loan when it matures, and could lose the house in a foreclosure action. Also you may be subject to higher market rates at the time of conversion should the rate market take a turn for the worse. This risk is eliminated by our one-time close construction loan.
Fixed interest rates. With a single-close construction to permanent loan, the interest rate during your construction phase as well as your permanent loan are both pre-determined at the one-time close. Borrowers can enjoy a low "interest-only" payments during their construction phase while still locking in their 30-Year Fixed loan at the same initial closing. Should the rate market drift lower during the construction the borrower is allowed to relock at prevailing market rates at time of completion. In contrast, the interest rate of a two-time close during construction is typically an adjustable rate fluctuating month to month during the construction phase, and the interest rate for the permanent loan will not be set until the house is completed – usually a year later.
Reduced closing costs. Closing costs can be a significant expense for your new construction purchase. Borrowers typically pay between 3% to 4% of the loan amount in total closing fees. Closing one loan instead of two can save thousands of dollars. This savings can then be better spent on items like landscaping, furnishings, window coverings, utility deposits, etc., usually not included in the cost of your construction.
Single appraisal valuation eliminates surprises. With a traditional two-time close construction loan, two separate appraisals are typically required – one for the construction loan and one for the permanent loan once the house is completed. If the second appraisal comes in at a value less than the original, the borrower will have to make up the difference in cash. In contrast, a one-time close construction loan usually only requires one appraisal prior to closing the loan, eliminating surprises when the house is completed.
Down Payments as low as 5%*. One of the significant benefits of a 5% down payment is that it allows you to access homeownership with a relatively smaller upfront cost. Traditional construction loans often require a higher down payment, usually around 20%. With a Conventional 5% down payment, borrowers can conserve their savings for other expenses during the build process.
What is a One-Time Close New Construction “Purchase” Loan?
A One-Time Close Construction “Purchase” is the loan process used when the borrower is NOT the current owner of the land on which the home is to be built. The borrower will use the funds initial disbursement from closing to purchase the lot from the Realtor or contractor and fund the construction of their custom home. The loan amount includes the sales price of the lot and the cost to construct the property less the 5% down payment.
What is a One-Time Close New Construction “Refinance” Loan?
A One-Time Close Construction “Refinance” is the loan process used when a borrower already owns the land on which the home is to be built. The borrower will use the funds from closing to pay off any existing liens on the lot as well as finance the cost of construction for their custom home.
What are the Requirements for a One-Time Close Construction Loan?
In order to qualify for a single close construction loan, you'll need a good credit score, and Onshore Mortgage will work to get your builder and project approved with our Lender upfront. Along with staying below the county loan amount limits mentioned above, the borrower must also meet the following requirements to qualify for a Conventional single-close construction loan:
Must have a steady income (new salary income can be used immediately with an income letter, hourly wage earners must have their income averaged over 24 months)
Must have a good credit score, 700 or higher.
Must have a low debt-to-income ratio below 50% of your gross income
If you're looking to build a new home in Massachusetts or Rhode Island, a single close construction loan may be the right choice for you. Contact Grant Menard today to find out more about our One-Time Close Construction Loan program and how we can help you buy your dream home.
*Credit and income restrictions do apply. Please visit our Disclosures page for a detailed breakdown of all loan types.