Construction loans are used to finance the construction of custom homes.
A Construction Permanent Loan is the mortgage product borrowers who wish to build a custom home typically use to finance their project. This loan product provides a line of credit which is used to fund the purchase of the property and then the construction of the home as the work goes in place.
It will then convert to permanent financing upon completion of the house and it's all done with a single loan closing. The loan application process is similar to applying for any other type of residential financing but there will be additional information required. Specifically, the borrower will need to provide a copy of the land contract, the builder contract, the house plans and specs. In some instances, the plans and specs can be provided after settlement.
Construction loans are for a period of 6-18 months starting on the day the construction line of credit goes to settlement. All payments during the construction process will be interest-only based on the outstanding balance on the line. Draws are periodic advances taken against the credit line for the builder to pay for materials and subcontractors as work on the house goes into place.
If the project is a renovation, often a portion of the first draw goes towards paying off any existing mortgages. Borrowers have the option of selecting the Settlement Company with whom they would like to work on their project, though we may make recommendations based on expertise in handling the nuances of this loan product.
The closing costs for both the Construction Loan and the Permanent Loan are paid at the initial settlement which is why this type of loan is also referred to as a Single Close Construction Loan. The advantage of this structure is that there is no duplication of the most expensive cost items namely title insurance and recordation taxes.
Before and during construction, the borrower will work with their
to determine the type of permanent financing that is most suited to their needs. Once the house is complete the loan will then be modified to the loan that was selected and that permanent mortgage will be the same as any other home mortgage such as a 30 Year Fixed, 5 yr ARM, etc.