One Time Close Construction Loan: How Does it Work?
Finance a Lot, Construction and Home With a Single Loan
This article covers financing new home construction.
The one time close construction loan enables homebuyers to finance the purchase of a lot, pay a home builder and convert the financing to a permanent home mortgage. All with a single loan.
Construction to Permanent Mortgage
If you’re in the market for construction to permanent loan, chances are you’ve heard of the nightmare stories associated with this process. Many lenders shy away from construction-to-permanent mortgages because they are complicated.
But it’s worth finding a lender that routinely funds these loans. The loan program saves time and money, and eliminates the stress of requalifying for permanent financing once construction is complete. I
What Is a One Time Close Construction Loan?
What is construction to permanent loan? This is a mortgage product that allows you to finance the construction, lot purchase, and permanent mortgage of a new home, all in one single loan. Most construction mortgages involve a two-step process. You must qualify before the construction and then re-qualify for permanent financing after permitting. That is not the case with this program.
Eligible Property Types
What types of homes are eligible for this construction to a permanent mortgage? Program guidelines allow manufactured, modular, and stick-built properties. The home must be a ONE-UNIT PRIMARY RESIDENCE ONLY.
Ineligible properties include single-wide manufactured homes, condominiums, and niche homes. (Kit homes, log homes, bamboo homes, metal homes, tiny homes, storage container homes, and any non-traditional construction types are niche homes). Multi-unit homes and multiple homes on one lot are also ineligible.
Available Loan Programs
What mortgage programs can you use for construction to permanent loans? At this time, Gustan Cho Associates offers this program for FHA, VA, and USDA loans only. Down payment requirements are the same buying an existing home (FHA=3.5%, VA= 0%, USDA= 0%). Automated Underwriting Systems (AUS) decisions determine debt-to-income ratios. See our AUS BLOG for more information. The loan qualifications are very similar to everyday FHA, VA, and USDA mortgages.
Minimum Credit Scores
What is the minimum qualifying credit score for construction to permanent mortgage? To utilize this program, you must have a minimum score of 620 for FHA, VA, or USDA products. What about the land for the permanent structure? You may purchase the land simultaneously from the builder or through a third party. You can receive it as a gift, inherit it or already own it. If you have equity in the land you own, you can use that for all or part of your down payment.
Can you use seller concessions for construction to permanent loan? The answer is yes, For example, with an FHA loan, you can receive up to 6% seller concessions. If you get the full 6% of concessions from the builder, you may not need to come out of pocket with much money for closing costs. You still need at least a 3.5% down payment.
Which Builders Can You Hire?
Who is the builder?
You must use a certified and licensed contractor to utilize this product. The builder must act as the general contractor and be responsible for “turn-key” completion of the home and all site improvements.
The program does not allow owner-builders or “sweat equity.” You cannot be responsible for or perform any of the construction or hire any subcontractors. You may not have any relationship to the contractors or builders. This must be an arms-length transaction.
How Does a One Time Close Mortgage Work?
How does the one-time close construction loan work?
- There will be a flat administration fee that covers all the construction-related fees and interim construction interest.
- The fee is charged directly to the builder, not the borrower.
- Therefore it is included in the contract or sales price
There are two options for the builder at this point, they may take a draw or choose not to have a draw during the construction phase.
If the builder decides to use a draw, it will be paid periodically throughout the construction process
- At closing, the land seller or the mortgage will be paid off / funded.
- This option requires a project review at the end.
- If the builder decides not to use a draw, this will streamline the process.
- The builder has agreed to no interim construction draws throughout the process.
- Builders will receive all monies at one time once the home is completed.
- This is the easier option for you as there are no third parties involved.
This will also have a lower administration fee.
Fees and Costs
What does the administration fee include?
- Administration fee
- Underwriting fee
- Closing coordination fee
- Interim construction interest
- Inspection fee
- Draw fee(s)
- Title updates
* Reminder that this fee is charged directly to the builder and therefore is included in the total sales price.
Who Benefits From a One Time Close?
Who is this construction to permanent loan designed for?
This program is not designed for any borrower or builder looking to build a million-dollar custom home when having perfect credit and a significant down payment,
This program is targeted at first-time homebuyers as well as repeat homebuyers looking for an affordable option to build a new home.
If you decide to utilize this construction to a permanent loan with Gustan Cho Associates, we must verify and register the builder. We will send the builder a questionnaire to complete. The builder will provide documentation verifying we are able to use them to complete the construction. If they choose the no draw option, we must verify their assets.
What happens at the closing?
Whether or not the builder chooses to take a draw, the land seller or the lot loan is paid first. After closing, the construction begins. The administrator will contact the builder with a welcome letter and provide the first draw if applicable.
They are now ready to enter the construction phase.
What happens during the construction phase?
- The administration fee covers the coordination with construction phases with the builder.
- When the builder completes construction, the administrator orders a final inspection.
- The appraiser verifies completion and livability.
- The builder provides a placement survey which will be sent to the title company.
- At this point, the administrator will send the final funds to the builder.
- Once all funds have been disbursed, the loan is 100% complete
The borrowers are now able to move in and start making their first payments.
Advantages of One Time Close Construction Loan
Why is this program so unique?
- This allows borrowers to build a new home with a low-down-payment option.
- The borrowers do not have to make a payment during the construction phase.
- What an amazing program, you can move into a brand-new home before you start making your payments.
The Team at Gustan Cho Associates is excited to roll out this program. New construction can be a headache, but we are here to make the process go as smoothly as possible. There will be questions regarding the information in this blog. We look forward to helping you BUILD YOUR BRAND NEW HOME.