Building your own home can offer many benefits. From building the house you’ve always dreamed of to giving you the flexibility to build in an area of your choice, it’s a great choice for homeowners who want options.One big decision you’ll need to make when deciding to build your own home is how to finance your new construction home.
Here are Two Basic Ways to Finance the Construction of a New Home:
1) Single Close Construction or One Closing Construction Permanent loans are also referred to as:
- single close loans
- construction to perm loans
- one time close loans
- construction conversion loans
- CTP loans
- Or even “all in one loans”
This product can be used to acquire the lot, build the house, then convert into your final amortized loan. You close one time, when you acquire the lot. During the course of construction you will pay monthly interest on the amount of money you have drawn, usually at prime plus 1% (as of march 16, 2020 the prime lending rate is 3.25%, so prime plus 1 would be 4.25%). The lender will inspect the progress of the construction at the request of the builder and then advance funds at intervals until the house is complete.
At that point, the construction loan will roll into its permanent phase without another closing. Then you will make regular monthly payments. (This type of financing may also be used when you already own the lot – the lender will pay off the balance of your lot loan if necessary). With this product for loan amounts up to $262,500, you can borrow up to 95% of the cost of the home and lot if it is a primary residence or second home, 90% if it is an investment property. If your loan amount exceeds $262,500, the percentage you may finance will vary according to the product selected.
2) Two-Closing Construction to Permanent (C-to-P) Financing Transaction Process
Two-closing construction-to-permanent mortgage transactions utilize two separate loan closings with two separate sets of closing documents:
- The first closing is to obtain the interim construction financing (and may include the purchase of the lot)
- The second closing is to obtain the permanent financing upon completion of the improvements. This is done in the form of a refinance. A modification may NOT be used to update the original note.
This product is used for various purposes. If your final loan is going to be a government loan (VA, FHA, RD), there is no one-closing product available. You may also wish to use a two closing product if it lowers your cash requirements for the lender to use the appraised instead of the cost of construction. The two closing construction loan will work the same as a one closing, except you will go to settlement on your final loan when the home is complete instead of rolling. This is generally a more expensive process. With this product it is possible to finance 100%. Your loan amount will be determined by the final appraised value and the product you have selected.