The Ins and Outs of Construction-to-Permanent Loans

Published on August 3, 2020 under Loan Programs

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If you're thinking of building a new home, you already know how stressful it is to pick a plan, a builder, and all the design elements. The last thing you want to worry about is your construction loan. Here are some tips on turning your building process into an easy, tension-free experience.

What Is a Construction-to-Permanent Loan?

This loan is a type of financing for new construction builds. Traditional home loans are valued based upon the appraisal of the existing property and the condition it's in. Construction loans are based on the projected value of the house when completed.

When construction of your home is completed, it will then be converted to a traditional home loan. This means only one closing, reducing closing costs and other associated fees. Qualifying for a construction-to-permanent loan requires higher standards and may mean you need to have a higher down payment and credit score to get one.

What Are the Benefits?

Construction loans are a great resource if you're building a new home. Here are just some of their advantages.

  • Without a construction loan, building a new house could cause even more stress. Two separate loans would be needed, which would mean two closings. The construction-to-permanent loan erases all of that and makes less paperwork, less worry about qualifying for certain loans, and reduces closing costs.
  • During the construction period, you only need to pay interest only portions on the amounts disbursed. Since the full amount of the loan won't be disbursed until construction is completed, payment on the principal is not necessary.
  • Disbursement of funds is different in a construction loan. Instead of the lump sum amount distributed for traditional loans, funds are withdrawn in installments according to the building process. There's usually a schedule for each such distribution, one for completion of foundation, when the framing is finished, electrical, etc.
  • Locked-in interest rates - The interest rate on a construction-to-permanent loan is locked-in, allowing for steady payments and no surprises when rates rise.
  • The flexibility of these loans is one of their selling points. You can buy your land and build a new home all with a single financing option. Not only that but when construction costs are increased due to upgrades or lowered because of cutbacks, your loan is usually not affected.

Things to Consider

While construction-to-permanent loans sound pretty great, there are a few things to consider.

  • Higher interest rates -Interest rates are usually a bit higher than with a traditional home loan. While interest rates are historically low right now, you need to expect to pay a bit more if you're a construction-to-permanent candidate.
  • Costs may be higher in the end - When you're purchasing a home already built, there's a fixed cost. New home builds are a different story. During construction, you may encounter lots of "extra" costs that add up over time. These "extras" will increase your loan amount and your future monthly payments.
  • Harder to qualify - Since construction loans offer more flexibility than traditional loans, they're harder to qualify for. Credit scores will often need to be higher and your down payment at least 20%.
  • Added appraisals and inspections - Other items to consider are additional appraisals and inspections, especially if it delays the construction process. But many lenders require appraisals before and after construction, along with inspections before draws are made.

If you're building a new home and looking for financing options, the professionals at First Savings Mortgage are here to help. We specialize in construction-to-build loans and can make your dreams come true. Contact us today, so we can help guide you through the home building process.

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