What Is A Construction To Perm Loan?

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There are lots of ways to finance a home purchase, but not everyone wants to buy a preexisting home. Some people dream of building a custom home that suits their needs, while others may have acquired a lot on which they wish to build. What happens when you are looking to build a home but cannot pay for the construction costs up front? One good option is a construction to permanent loan, which enables borrowers to finance the construction of their home and then serves as a traditional mortgage once it is built. Here is a closer look at what is involved in a construction to permanent loan.

A Construction To Permanent Loan Is A Single-Close Loan

couple standing on new purchased land imagining new homeWhen building a new home, it is customary to start with a construction loan that enables you to purchase the land the home will be built upon, if you do not already own it, along with the costs of building the home. Once it has been built, homeowners need to take out a separate mortgage in order to finance it. However, with a construction to permanent loan, there is no need to obtain two different loans. Instead, homeowners can obtain a single loan to buy the land and build the house, and this will later convert to a permanent mortgage once construction has been completed. The terms will usually be similar to those of other types of mortgages, such as 15 or 30 years with a fixed interest rate. With this type of loan, interest payments are generally only required during the construction process. The interest rate will be calculated according to the loan proceeds that were paid out to the builder for completing the home. During the construction process, you will pay the builder for work as it is completed. The lender will typically require verification that the work was carried out before they provide the money, usually with an in-person inspection. After the home is constructed, the homeowner must start making payments on the principal as the loan shifts from the construction phase to the permanent phase. At this point, it will also be necessary to obtain proper insurance, such as homeowners and flood insurance.

An Example Of A Construction To Perm Loan

To illustrate how this works, imagine that you are looking to purchase a lot and build a custom home on it. First, you will obtain estimates from several builders and use them to apply for a construction to permanent loan. Second, if approved, you will start taking draws from the proceeds of the loan to pay your builder. For example, you might need to draw $4,000 for clearing the land and $20,000 to build the foundation. At each stage, your lender will inspect the property to ensure the work has been completed. After verification, you can move to the next phase of construction and request another draw to cover it. Then, this process will repeat until every phase of construction has been completed. After you move in, your loan will become a permanent one and it will be time to start making regular payments toward your mortgage, just as you would with a traditional mortgage on a preexisting home.

The Benefits Of Construction To Permanent Loans

banker helping clients with construction to perm loan applicationOne of the biggest benefits of this type of loan is its ability to save homeowners time and money during the construction process. They only need to apply for a single loan instead of obtaining construction loans and mortgages separately. This also means there will only be a single closing. Moreover, the payments during the construction phase are interest-only and are typically fixed, which can protect against rising rates. Then, when the loan enters the permanent mortgage phase, homeowners can enjoy the predictability of a fixed interest rate on their monthly payments.

The Downsides Of Construction To Permanent Loans

A construction to permanent loan is generally a favorable way to finance the construction of a new home, but homeowners should ensure they are not paying a higher interest rate overall for the combined loan than they would pay for two separate loans. These loans can be riskier for lenders and may come with a higher rate as a result. Another important consideration is the down payment requirement. In many cases, the down payment might need to be 20 percent or higher. This means there is a bigger outlay of cash required. There may also be more paperwork involved in the application process, such as supplying the lender with a copy of building plans and proof of the builder’s licenses and bonds.

Learn More About Construction To Permanent Loans

A construction to permanent loan is a great option for many homeowners who wish to build their dream home without needing a second mortgage. Reach out to the mortgage professionals at Woodsboro Bank to discuss your objectives and obtain personalized home financing solutions created with your needs in mind.