Why Would I Need a New Construction Loan?

Finding the perfect house can be challenging to say the least. Style, size, and location are just a few of the things people consider when house hunting. Often, when people can’t find their dream home, the one that checks all their “must have” boxes, they decide to build.

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What Is A One-Close Construction Loan?

A One-Close Construction loan is a single closing construction loan. The short-term financing during the construction phase is an interest only payment.  This financing is automatically modified into your permanent mortgage upon completion of the home.  If interest rates have improved during the construction phase your interest rate will automatically float down to the current market rates prior to closing.  

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What Is A Two-Close Construction Loan?

​In a Two-Close Construction loan you'll obtain interim construction financing from your local bank or credit union to pay for the construction.  Once the home is completed, we will work closely with you to ensure we align your permanent financing with your long and short-term goals.  When we close on your permanent financing, the construction loan is paid in full. 

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What Are The Benefits Of A One-Close Construction Loan?

1. You only need to qualify once.   Since there is only one closing, once the construction loan is approved and closed the approval process is over and your dream home will be officially yours when it's completed.  On a Two-Close, the income and asset documents will expire during the construction phase.  So you will most likely need to provide updated pay stubs, bank statements and a new credit report will be required if construction has exceeded 90 days.  

2. There is less risk on a one-close.  A lot can happen in 6-9 months.  Having one closing and one approval process before construction begins alleviates the unexpected, such as significantly rising interest rates or a change in your personal circumstances.    

3. More convenient.  Let's face it, there is a lot of paperwork to sign on a mortgage loan.  Signing it all once is definitely easier.  

4. Lower closing costs.  Closing costs on a mortgage can be a significant expense.  The costs on a two-closing construction loan may look lower because they are split between two loans but when you compare the total cost the closing costs on a one-closing construction loan are typically lower.  Also, It's not uncommon to hear, "we charge an origination fee on the construction loan but we waive it on the end loan".   If you are hearing this, shop around.  You are most likely paying for the origination fee.  It's just built into the interest rate.  

5.  One appraisal.  Often on a two-closing construction loan a second appraisal is required.  A one-closing construction loan only requires one appraisal.  

6. Interest rate protection.  On a one-close construction loan your interest rate is locked from the beginning of the loan process.  When your home is complete, if interest rates have improved, your rate will automatically float down to the current market rate.  However, if interest rates increase you are protected.  On a two-close construction loan there are two separate lock periods.  So, you may not have the same protection or float down benefit.

7. Lower down-payment requirements.   There is a large disconnect between the bank financing and the end loan.  So, even though you may be approved for a lower down payment on the end loan, typically the banks will require a 20% down payment on their construction loans.  On a one-close construction loan you can put as little as 5% down on a conventional loan and 0% on a VA loan. 

8. The one-close construction loan can be used on a VA loan.  The funding fee can not be financed but you can finance 100% of the cost to build and the appraised value of the lot on a one-close construction loan.  

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Construction Loans Vs. Traditional Mortgages

There are several key differences between a construction loan and a traditional mortgage. Construction loans are short-term loans, usually no longer than a year in length. On the other hand, traditional mortgages are long-term loans, with terms typically ranging from 15 – 30 years. With a mortgage, the borrower receives the money in one lump sum. Upon closing on the loan, the payments start immediately and consist of both principal and interest.  When you take out a construction loan, you’ll usually make interest only payments while the construction is being completed. Once your home is complete, you’ll take out a traditional mortgage, which will payoff your construction loan.  We will work closely with you and provide as much information as you need so you can make an educated decision on which traditional mortgage aligns best with your goals.