If you’re planning to build your dream home on a specific lot you already own (or want to buy), one of the biggest challenges you might face is finding a loan to finance your project.
Enter the “one time close construction loan.”
- A one-time close new construction loan is a single closing construction loan for both the land and the construction.
- The construction portion is short-term financing that is modified into permanent financing upon completion of the project.
- A single closing construction mortgage can be used for a purchase or a refinance.
In this short article, we’ll take a closer look at what one-time construction loans are, how they work, and what you need to know to get one.
Table of Contents
What is a One Time Close Construction Loan?
A one-time construction loan, also known as a “construction-to-permanent loan,” is a short-term single closing loan that provides funding for the construction of a new home.
Unlike traditional mortgages, which are used to finance an existing home, a one-time construction loan is specifically designed for building a new home.
The cool part is you can wrap the land and the construction into one loan.
What is a Single Closing Loan?
A single closing construction loan is the combination of financing of the construction and the permanent mortgage.
There is a single closing transaction that occurs prior to construction beginning.
Closing costs and fees that the borrower is responsible for are collected at time of closing.
Funds are accessed through draws and there will be an initial draw at closing for proceeds to the contractor to begin the construction project.
How Does a One Time Construction Loan Work?
One-time construction loans typically have two phases: the construction phase and the permanent mortgage phase.
During the construction phase, you’ll receive funds in stages as your home is being built.
These funds are typically disbursed to your builder or contractor as each stage of construction is completed.
As a borrower, you’ll only pay interest on the amount of funds you’ve drawn, not the total amount of the loan.
Once construction is complete, the loan will convert into a traditional mortgage, and you’ll begin making regular mortgage payments.
Once the build is complete, you can float down the loan to secure a lower interest rate if the market improves or stay locked in no matter the market shift.
What are the Requirements for a One Time Construction Loan?
To qualify for a one time construction loan, you’ll need to meet certain requirements, including:
- Conventional or VA loan: A construction loan is normally structured as a conventional loan or a VA loan.
- A strong credit score: Typically, lenders require a credit score of 620 or higher to qualify for a one-time construction loan.
- A down payment: You’ll need to make a down payment of at least 5% of the total project cost. This is to ensure that you have some skin in the game and to reduce the lender’s risk.
- Detailed construction plans: You’ll need to provide detailed plans for your new home, including blueprints, materials lists, and a timeline for construction.
- A qualified builder or contractor: Lenders will require you to work with a qualified builder or contractor who has a proven track record of completing similar projects.
What are the Benefits of a Construction Loan?
One of the biggest benefits of a construction loan is that it provides funding for the construction of a new home.
This means you won’t have to worry about financing the project out of pocket or taking out multiple loans.
Additionally, because the loan is converted into a traditional mortgage once construction is complete, you won’t have to worry about refinancing your home once construction is done.
However, you absolutely can refinance later if rates drop—totally up to you.
Another benefit of a one-time construction loan is that the interest rate is typically lower than a traditional mortgage.
This is because the loan is secured by the value of the property being built, which reduces the lender’s risk.
In conclusion, a one-time construction loan can be an excellent option for borrowers looking to build their dream home.
As always, it’s a good idea to shop around and compare loan offers from multiple lenders to ensure you’re getting the best deal.
Need Help With Your One Time Construction Loan?
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If you’re thinking about a one-time construction loan, or if you have questions about getting the best interest rate, obtaining jumbo loan financing, or any other questions about what loan products you may qualify for, you can get in touch with us HERE.
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About the Author
Brian Reese is a senior advisor and co-owner at District Lending. He is one of the world’s leading experts in veteran benefits, having helped millions of veterans secure their financial future since 2013. Brian is the founder VA Claims Insider, an education-based Coaching & Consulting company whose mission is to educate and empower veterans to get the VA disability benefits they’ve earned for their honorable service. A former active-duty air force officer, Brian deployed to Afghanistan in support of Operation Enduring Freedom. He is a distinguished graduate of management of the United States Air Force Academy and earned his MBA as a National Honor Scholar from the Spears School of Business at Oklahoma State University.
In Brian’s Own Words:
“As a military veteran, I’ve made it my life’s mission to help people live happier and wealthier lives. District Lending brings this mission to life. We believe in integrity, honesty, and transparency, which is why you’ll see our rates right on our website. You’ll find lower rates and zero lending fees, which means you can buy your dream home for less. The savings are passed on to you — the way it should be.”
– Brian Reese, Advisor and Co-Owner, District Lending