This is a loan used for new construction. Most lenders start out with a construction loan during the construction process. This is where the builder gets paid once they reach certain stages in the homebuilding process and are paid through the loan proceeds by way of a draw (normally 4). This is a process that can take 6-months to a year. Once the home is completed, the borrower needs to convert to a fixed rate or refinance. Either way, the borrower incurs additional cost for the new loan. With a one time close, a borrower saves time and money. They avoid paying a second set of closing costs. If the rate comes down, we will adjust it. The builder is allowed to take up to 10 draws, which helps them with the flow of the build.
A One-Time Close Construction Loan, also known as a construction-to-permanent loan, is a type of financing that combines the features of a construction loan and a traditional mortgage into a single loan. It is designed to simplify the process of building a new home or making significant renovations to an existing property. This Process can be very involved. For expert advice, contact Mike Stoy at Epic Mortgage.
Here's how a One-Time Close Construction Loan typically works:
- Application and approval: You apply for the loan with a lender, providing information about your income, credit history, and the details of your construction project. The lender evaluates your application and, if approved, provides you with a loan commitment.
- Construction phase: Once approved, the loan proceeds are used to fund the construction of your home. During this phase, you'll work with a builder or contractor to complete the project according to the agreed-upon plans and specifications.
- Draws and inspections: The lender disburses funds to the builder in periodic installments, known as "draws," as construction progresses. Typically, the lender will conduct inspections at various stages to ensure that the work meets the agreed-upon standards before releasing each draw payment.
- Conversion to permanent mortgage: Once the construction is complete, the loan automatically converts into a permanent mortgage without the need for a separate loan application or closing. You start making regular mortgage payments, which include principal and interest, just like a traditional home loan.
One of the main advantages of a One-Time Close Construction Loan is that it eliminates the need for borrowers to secure separate financing for the construction phase and the permanent mortgage. This streamlines the process, reduces paperwork, and potentially saves on closing costs.
Additionally, during the construction phase, you typically only pay interest on the amount disbursed by the lender, rather than making full principal and interest payments. This interest-only period can provide some financial flexibility as you're building your home.
It's important to note that eligibility requirements, loan terms, and specific procedures may vary among lenders. It's advisable to consult with multiple lenders to compare loan offers and choose the one that best fits your needs and financial situation.
