Because this is a combination of the construction loan and the permanent loan, also known as a single-closing loan, you'll only pay one set of closing costs. You'll set the interest rate on the permanent loan before closing (and before construction begins). While the home is under construction, you pay only the interest on the outstanding balance. Once completed, the construction loan becomes a permanent loan product, usually a conventional mortgage program.
In general terms, lenders usually finance between 80 and 95% of the estimated value (LTV), which means that you should plan for a down payment of 20% to 5% of the planned permanent mortgage. Keep in mind that these loans usually set a higher interest rate than other products, reducing risk for the lender. The FHA single-closing loan allows borrowers to finance construction, the purchase of lots and the permanent loan in a single mortgage. It provides for a one-time one-time closing with a minimum down payment of 3.5 percent.
Available loans vary depending on FHA county lending limits. When applying for a construction loan, you should consider the cost of building the house, the cost of buying the property, and determine how to manage the full cost later, possibly with a permanent mortgage when the house is complete. We have done extensive research on single-closing loan programs for construction by the FHA (Federal Housing Administration) and the VA (Department of Veterans Affairs). The lender often has to approve the builder before approving it, and then pays the builder after completing and inspecting each phase of construction.
So, after construction is finished, you'll need a way to transition to a longer-term loan, especially if you want the lower payments that a 30-year mortgage would entail. The funds from these construction loans are disbursed based on the percentage of the project completed, and the borrower is only responsible for paying interest on the money extracted. Borrowers are usually only required to repay interest on funds extracted to date until construction is complete. Your other options include an FHA loan for permanent construction with less stringent approval standards, which may be especially useful for some borrowers, or a VA construction loan if you're an eligible veteran.
While the house is being built, the lender has an appraiser or inspector check the house during the various stages of construction. The advantage of the build-to-permanent approach is that you only have to pay a set of closing costs, reducing your overall rates. You can also convert the loan into a conventional mortgage, known as a permanent construction loan. Depending on the type of construction loan, the borrower could convert the construction loan into a traditional mortgage once the house is built.
In addition, the borrower can use this type of loan to purchase the land where the house will be built and pay for contracted labor costs, construction supplies, permits, and other expenses associated with construction. Loan officers and the management they work for carefully examine proposed construction projects before deciding whether or not to finance the transaction. Ultimately, construction-only loans can be more expensive if you need a permanent mortgage, since you complete two separate loan transactions and pay two sets of fees.
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