Residential New Construction and Renovation Financing

Construction Permanent Loans

Construction Permanent loans are also know as One Time Close. These loans provide money for construction or, in some cases, renovations to existing homes. At the end of the construction phase, the loan converts automatically to the permanent loan. The loan is made to the borrower, rather than to the builder.

In the way of comparison, construction loans can be made to the borrower or to the builder, but must be refinanced into the permanent loan at the end of construction. With construction loans there will be another set of closing costs. Generally, the construction lender requires a “take out” letter from the permanent loan lender before closing the construction loan.

The construction loan typically has an interest only, adjustable rate ;ayment during construction. The construction phase usually has a predetermined expected construction period – 6 months, 9 months, 18 months, or even 24 months.

Program selection is based on a number of features. Construction fees, rate during construction, builder requirements, permanent loan options and locking procedures are among the considerations that should be made.

We used to offer construction permanent option with a number of different lenders. During the recent mortgage problems, many lenders had dropped their construction permanent programs. We have been able to continue to offer CP programs to our clients.

Generally, there are three approval tracks. As with a loan on an existing home, the borrower must be approved on the basis of character, capacity, and collateral. See my page on qualifying. Secondly, for construction approval loans the builder is approved, and thirdly the construction plans and the appraisal for the complete home must be approved. In addition, the transaction structure must meet the program guidelines. That means that the equity on the permanent loan must be determined, after considering the final loan amount, acquisition costs, the after completion appraised value.  Acquistion cost is the total cost of constructon including land costs.

Required Documents for Construction Permanent Loans

Builder Approval – most programs require experienced builders. Documents typically required are resume, liability insurance, license (if required by government authority).

Plans Approval – construction plans included the contract, the Plans and Specs, Description of Materials, and appraisal on the “after value”. The approval typically must have an allowance for construction Change Orders. The type of contract between the builder and the borrower is also considered.

Construction Rate – rate during construction. Typically an adjustable interest only payment. Interest is paid on the amount actually lent out for construction.

Construction Fees – these include normal closing costs. See my section on Settlement Costs. There are additional costs associated with the construction servicing aspect of the loan. These additional costs pay for the overhead to administer the construction disbursements and other requirements of ensuring that your construction phase is managed properly.

Construction Phase - must allow time to complete construction. Typically, there are minimum construction periods based on square footage or price of construction.

Aquisition Costs and Equity Determination -

Permanent Options – many different program options are available for the new home owner. Generally, the borrower is qualified for a specific program when the loan is initially approved. In many cases the final selection of the permanent loan can be made closer to the time of conversion or modification.

Rate Float Down and Permanent Lock Options – the permanent loan interest rate is typically the general market rate at the time of lock. The lender of course has already been selected, so the permanent interest rate cannot be “shopped” among various lenders. Some programs offer a Float Down option. This allows for the permanent rate to be locked during construction, and floated down at conversion if the market rates are lower at that time. This gives the borrower some upward protection. Both the initial lock and the final float down rates are somewhat higher than normal market rates.

Modification or Conversion to Permanent -

Extension of Construction Phase – borrowers should know the policies, procedures, and costs with the lender if an extension of the construction phase is required.

Specifics are provided on our program page. You can access this page by clicking here. You will need a password to access this page.