Section 3: Construction to permanent Loan Benefits
Construction to permanent Loan Benefits
There are several upsides to a construction-to-permanent loan. If you want to build a home from the ground up, your first move is to purchase a plot of land. Then you can begin the construction process. That would normally entail getting one loan to cover the purchase of the land and costs of construction, and a second loan for the mortgage on the finished residence. But you can save time and money by pursuing a construction-to-permanent loan. This option simplifies the financing process by providing one loan and one closing transaction. There are some caveats to keep in mind though: You may end up paying a higher interest rate, or a larger down payment may be required. And your lender may have additional requirements and restrictions.
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1. Credit
Credit score required to undertake a construction project is 620 or higher. And for many, this is just the minimum, as some lenders may require a score of 720 or better.
2. Line of Credit
For one, this kind of loan works like a line of credit in that you’re allowed to draw exactly the amount of money you need at the time you need it.
3. Interest
Another benefit is that you’re charged interest only on the amount you draw on during the construction phase. While your home is being built, you’ll only be making interest payments on the construction part of the loan — for up to 18 months. So your payments will be lower during this period than if you had taken out a different kind of loan. That kind of flexibility comes in handy, especially if the construction is taking longer than expected.
4. Single Loan
Perhaps best of all, you don’t have to apply, qualify, complete paperwork, or pay closing costs for two different loans. That can save you time as well as money otherwise spent on separate application and settlement fees.
5. Competitive Interest Rates
Additionally, for both the construction phase and the mortgage phase you can usually lock in a fixed interest rate up to 18 months in advance.
6. Lifetime Benefit
The ability to be able to build and bundle a home loan as one is a benefit you will have for your lifetime. Construction to permanent loans get you into one of the best loans which you will be able to use and benefit from for the rest of your life. This is a loan that you can use multiple times.
7. Appraisal
An appraisal is an opinion given by a licensed appraiser on the value of a property. The appraiser must follow set rules when appraising a property. The appraisal is just as important as your income, credit and assets when you’re applying for a construction loan. For new home construction, the appraisal is even more important than an appraisal for an existing home.
The two options here are if the builder will finance or if the buyer will finance. Usually, when the builder is the borrower, they:
- Own the lot already
- Don’t know who the future homeowner will be
If you’d like the builder to fund the construction, then a “subject to” appraisal will be performed at the time of the initial underwriting.
A “subject to” appraisal is where the value of the property is based off what the home will be worth in the future. It helps you evaluate the home after the improvements have been made. “Subject to” appraisals are a good way to make sure you don’t “over-improve” your home.
Appraisals are good for 120 days or 180 days for Veterans Affairs Loans (VA). If the house is not completed within this time, either a “Recertification of Value” or a new appraisal will be completed by the appraiser before the purchase is finished.
When the house is complete, the appraiser will provide a “Final Inspection” report. It’s important to note that if the builder finances the construction, the Loan-To-Value (LTV) is calculated by using the lesser of the purchase price or the appraisal.
The other side of the coin is if you, the buyer, will be financing the construction. Usually, when the homeowner is the borrower, they:
- Own the lot already
- Have a contract for construction with a builder
- Will use the loan funds to pay their builder
In this process, there are no drastic differences between this and builder financed. This appraisal process starts off with a “subject to” appraisal performed at the time of the initial underwriting. The appraisals are still good for 120 days or 180 days for VA loans.
If the house is not completed within this period, either the appraiser will complete a “Recertification of Value” or a new appraisal, although there is an exception for VA loans.
10. Loan Limit
Loan limits are determined by your county and the conforming loan limits. Although conventional loan limits are very competitive it is important to have that discussion with your realtor and loan officer.
Common Questions on Conventional Loans
- Are construction to permanent loans better?
Everyone has unique needs for their buying situation. Although construction to permanent l loans are very competitive, they are not always the best choice for the consumer. Because of that we recommend you talk to your loan professional for your specific needs.
- Are there any benefits to sellers?
Construction to permanent loan buyers have the lease restrictions when it comes to buying and is typically a sought-after product when looking at offers.
- What are Orbit Realty’s and Orbit Home loans benefits?
With Orbit Realty you and Orbit home loans you get the benefit of working with a team that is highly trained and qualified. Okay, maybe every company says they have that, but the truth is that only 10% of companies nation-wide have both a real estate and mortgage company combined and because of that we are able to be one of the most competitive lenders on the market. We are also able to pass savings onto you buy not having to change additional fees that you often see with other lenders.
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