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Construction home loans are offered through conventional, FHA, VA and USDA home loan financing. A construction loan offers benefits to the homebuyer and the homebuilder and can reduce the cost of construction. It is important to know the difference between a one-time close home loan and a construction loan when you are considering building a custom home.
Construction Loan vs. One-time Close Construction Loan
A construction loan is used to cover the cost of construction from the start of the project to the time the home is complete. This type of loan is typically used by the homebuilder. A one-time close home loan is used to cover the cost of construction and converted to permanent financing upon the completion of the project. This type of loan is used by the homebuyer to secure a rate lock and reduce closing costs.
Benefits of a One-time Close Home Loan
The homebuyer and homebuilder both benefit from lower risk. With the one-time close construction loan, the homebuyer is able to lock the construction loan rate at closing and can take advantage of a rate float-down if mortgage rates drop prior to the completion of the home. Rate lock is different with a stand-alone construction loan, the homebuyer locks on the permanent financing after the home is built and is not protected against increases in mortgage rates. Another benefit to the homebuyer is the lower cost of closing due to closing one-time as opposed to closing on the construction loan then a second time with the permanent mortgage financing.
The homebuilder benefits from the one-time close in several ways. First, the homebuilder is not responsible for the financing during the construction period. This means that the builder will not have monthly or quarterly interest payments to make on a short-term construction loan. This frees up a builder’s cashflow and allows the homebuilder to expand their business. Second, the homebuilder is not responsible for any portion of the property tax with the one-time close program. Third, the homebuilder never has to worry about the homebuyer’s qualification during the construction period. With a one-time close, the homebuyer is qualified from the start and closes on the loan prior to the start of construction, thus, reducing the risk of a homebuyer disqualifying for the home loan before construction is complete.
Applying for a one-time close construction home is simple.
Homebuyers thinking of building a custom home should consider the one-time close construction loan. Here are a few reasons:
The construction loan requires a 5% down payment. However, the down payment can be offset with your home’s equity. For example, if a homebuyer owns the land that will be used for the subject property loan, then the loan-to-value (LTV) is based on the appraised value of the home. Therefore, a down payment may not be required. The land acquisition can be included in the construction loan.
Construction Loan Rate
While construction loans are offered through USDA, VA and FHA, conventional construction loans have the least restrictions. The rate on a construction loan is locked at the time of project approval and completed loan application. During the construction period, the homebuyer is responsible for interest only payments on the total balance of the draws. The total principal and interest payment will begin after the home is complete. The rate is based off of the current market rate at the time of rate lock with an additional 75 basis points added to the final rate. Locking at the start protects against rising interest rates that could cause an increase in mortgage payments. However, a float-down is allowed for homebuyers to take advantage of a lower rate in the case mortgage rates drop.
Own land? Talk to use about using your equity to eliminate the need for a down payment. Our wholesale mortgage rates can reduce closing costs.
The one-time close program removes the stress of managing a line of credit, unimproved property tax liability, and the risk of homebuyers disqualifying prior to the home’s completion. Eliminating construction loan credit lines to start construction allows homebuilders to leverage their business to the maximum their subcontractors can handle. No interest payments means more profit and an added advantage over the competition. Contractors can get added to the list of qualified homebuilders with a quick portfolio summary that illustrates homebuilding experience.
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Increase your book of business with a wholesale mortgage partner that can offer homebuyers an incentive that can give you an edge over the competition.
When the perfect home layout is not available in the local market, a custom home is a solution for homebuyers. However, some large homebuilders have waiting lists, floor plans that are not ideal, high home prices, or high mortgage rates from their in-house lenders. A one-time close loan is a solution. Moreover, with the one-time close construction loan, real estate agents get paid sooner. Since the loan is closed shortly after the project approval, real estate agents receive their commission check right away instead of waiting through the entire construction period.
As a wholesale mortgage broker, our lower mortgage rates will increase homebuying power. Your clients can use the difference between a retail rate and a wholesale rate to reduce their closing costs. Sell more homes with lower loan costs.
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