How Does A Construction To Perm Loan Work?

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Finding everything that a homeowner wants while house hunting can be challenging, leaving many to consider building a custom home that meets their family’s needs. Some people may dismiss the idea early in the process because they believe it is not within their reach financially, but most lenders offer a variety of construction loans that are specifically designed for home buyers in this situation. One option that can be particularly useful for building a custom home to the owner’s specifications is a construction to permanent loan.

The Basics

a home getting built with a construction to perm loanTo understand how a construction to permanent loan works, it is useful to be familiar with the more traditional method for financing home building: a construction loan. This provides the funds needed to complete the construction of the home. The borrower must then pay the loan off in its entirety at maturity if they can afford it, which is typically within a year. However, most homeowners cannot pay it off at that time and must then obtain a mortgage for permanent financing. Because a construction-only loan is usually followed by the need for a mortgage, borrowers will be required to complete two loan applications and transactions, which can be a long and drawn-out process, in addition to paying two sets of fees. This also means paying closing costs that can amount to thousands of dollars twice. In some cases, a borrower’s financial situation may take a turn for the worse during construction, such as if they lose their job or face some other form of financial hardship. This could mean they cannot qualify for a mortgage and won’t be able to move into their newly constructed home. A construction to permanent loan, however, combines these two loans into one, which means the borrower only needs to contend with one application and pay one set of closing costs, so there won’t be any duplicate settlement fees. The lending institution issues money for construction costs and then converts the loan into a permanent mortgage when the borrower moves in.

The Steps Involved

An aspiring homeowner can apply for a construction to permanent loan if they already own the lot on which they wish to build, or they can apply for the loan to cover the cost of the lot in addition to construction. The first phase of this type of loan is known as the construction phase. During this period, borrowers only have to pay interest, with payments calculated based on the proceeds of the loan that have been issued to the builder for the work they complete on the home. The builder will be paid in stages as they complete the steps in construction, such as clearing the lot or building the foundation. After each stage, the lender will verify the work was completed before issuing money from the loan proceeds. Often, this will entail an inspection of the work at the home site. After the home is fully constructed, it transitions to a conventional mortgage and the borrower will become responsible for paying principal payments as well as interest. These payments will be made in accordance with the terms set by the lender.

Down Payments

construction to perm banker using a calculatorThere are many advantages to getting a construction to permanent loan, but borrowers should keep in mind that the down payment and credit score requirements may be different from those on a conventional mortgage. Many lenders will require a down payment of 20 percent or more, which means borrowers will need a greater reserve of cash to get approval depending on the construction cost of the home. They may also need to complete additional steps during the application process, such as proving to the lender that the builders are bonded and licensed and furnishing a copy of their building plans.

Property Requirements

There may be some property requirements that apply when obtaining this type of loan that differ from those of conventional mortgages. The property itself may need to meet certain specifications. In addition, the lender may require that the building be limited to a single-family home that will be used as a primary residence rather than a multifamily home, even if the borrower plans to live in one of its units.

Applying For A Construction To Permanent Loan

When applying for a construction to permanent loan, borrowers should be prepared to provide information about their income, debts, assets, and credit score, along with their building contract and plans. It may also be necessary to have the land appraised and tested to ensure it is suitable for construction.

Discuss Your Dream Home With The Experienced Maryland Lenders

A construction to permanent loan can place your dream home within your financial reach. To find out more about how these loans work and whether you qualify, get in touch with the residential mortgage professionals at Woodsboro Bank.