You’ve decided to build your brand new Custom Home and need financing.
Now comes the part when you are looking for financing and you hear the terms one-time close and two-time close Home Construction loans. Many people choose to do a Custom Home Construction loan because they’ve decided this is the last home they will ever own and they want it to be just right. They may have had a mortgage before but never had to hire a builder, engineer and/or archtect.
As with buying an existing home you’ll want to get your financing ironed out before you start sinking money into having plans drawn up. There are some huge differences in Interim or Custom Home Construction loans and I cover that in this another blog post at this link.
So what is the difference between a one time and a two time close home construction loan?
The one time close home construction loan
- Terms such as length of time of the construction phase, the term of the permanent loan and payments for both are set for the interim loan. The Amount of permanent loan is not set because the project is not complete. The amounts and frequency of payment or “draws” that are to be made to the builder are also determined. Note: No money is disbursed from the home construction loan until the specific construction phase is complete and inspected by the bank. This makes sure that builder did what they said they were going to do in the initial contract.
- During this phase, you only make interest payments on the amount that has been borrowed to date from the home construction loan. Once your home is complete and you obtain the certificate of occupancy you go into the bank, pay escrows (if you decided to escrow your taxes and insurance) sign a few papers and the bank modifies the home construction loan to a permanent loan.
- The greatest strength of the one-time close Home Construction Loan is you don’t have to go through underwriting twice.
The two time close home construction loan
- Is just like the one-time close home construction loan as noted above during the construction phase of your project. However, once your home is complete the loan must be paid in full. This is why they are generally called an “interim home construction loan” because they are not permanent financing.
- The advantage of a two-time or interim home construction loan is if you have updates to the original plans and specs otherwise know as change-orders. You must pay for those out of pocket because they were not in the package that was approved. You may be able to, with proper documentation, get back the money back when you get your permanent loan. Generally with a good builder, designer and architect your change orders will be few if any.
- Depending on your loan size recent mortgage reform laws may require you to do a 2-time close. Call us for details.
The down side of the two-time close home construction loans are:
- Just as you did with the interim loan initially you will need to apply and go through a whole new underwriting phase again. Most banks this is a huge process because they broker these loans. We do not so the 2nd underwrite is mostly just an updating of information.
- You pay a whole new set of closing fees again. With Many lenders that can be $5,000 to $10,000 or more. With our 2nd close our fees are less than $1,500
Which type of Custom Home Construction Loan is Right for you?
If you have questions about Custom Home Construction Loans nationwide just contact us or to see if you are in an area where you can obtain a custom home construction loan we lend nationwide.
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