When you build a home, the financing process for it can feel overwhelming and complicated. One option you may have that can make your journey feel a bit more efficient and smoother is a construction-to-permanent loan.
But do you know what this process entails? Discover how this type of loan works, its benefits and some other loan options for your construction project.
What is a Construction-to-Permanent Loan?
Also known as a one-time, single-close or construction-perm loan, a construction-to-permanent loan helps finance the building of your home and converts to a traditional mortgage after construction is complete. This type of loan helps streamline financing and allows you to pay one set of closing costs on one single transaction.
A construction-to-permanent loan has two phases: construction and post-construction. During the construction phase, your lender would authorize any costs including materials, the plot, labor and more. During the post-construction phase, it will convert into a mortgage, and you’ll then pay it like any other monthly mortgage payment.
Benefits
There are a couple of positives to a construction-to-permanent loan for borrowers building a new home that you may not be able to get from other types of loans.
Interest-Only During Construction
Many construction-to-permanent loans typically allow or are set up for interest-only payments during the construction phase. After this initial phase, you’d have a payback period. This will help you budget for other financial responsibilities throughout the construction of your home, especially if you still have rent or an existing mortgage to worry about.
One Financing Process and Closing
A construction-to-permanent loan would allow you to have one closing and let you pay only one set of closing costs. This would help you save time and money that you’d otherwise spend on two separate loans (and two separate sets of closing costs) that would allow you to pay for the construction and mortgage separately.
Draw Funds as Needed
As your construction project progresses, the lender will authorize fund withdrawals to builders only as needed. This can help keep your funds safe, helping to manage your payments and costs so you’ll know exactly where your money is going throughout your journey.
Alternative Options
If you’re still on the fence about applying for a construction-to-permanent loan for your project, you may want to learn about or consider these other options.
FHA Construction
If you qualify, you could build a home with a construction-to-permanent loan offered by The Federal Housing Administration (FHA). These act the same as a conventional construction loan, but FHA loans typically require a credit score of only 580 with a 3.5 percent down payment. However, you’d have to pay mortgage insurance premiums (MIP) for the life of the loan.
Home Equity Line of Credit (HELOC)
A home equity line of credit (HELOC) could work for you if you already own a property. This would help you tap into the home equity you’ve already built, and you could use these funds to help pay for the construction of your new home. Keep in mind that if you can’t cover the project in its entirety with the money from a HELOC, you’ll have to find other methods of payment to fund the rest of the costs. In addition, the home you already own would act as collateral for the HELOC until it has been repaid.
Personal Loan
A personal loan would allow you to borrow one lump sum of money for your construction project. Personal loans generally have higher interest rates than other loans, but you would have immediate access to your funds. These types of loans could have higher monthly payments and a shorter term, but this could also mean you could pay this debt off faster.
Cash-Out Refinance
Like a HELOC, you can tap into your home equity of an existing owned property with a cash-out refinance. However, this option would replace your current mortgage with a new one that has different (often more favorable) terms. If interest rates have dropped since you originally secured your mortgage, it could be a good time to refinance and take advantage of your existing home equity in addition to possibly paying less in interest.
VA Construction
If you’re an eligible veteran, active military member or spouse of one, you may be able to qualify for a U.S. Department of Veterans Affairs (VA) construction loan. These loans offer some specific advantages for eligible borrowers including no minimum credit score, no mortgage insurance and no down payment requirement. Be sure to check with your specific lender, as lenders can set their own requirements.
Can a Construction-to-Perm Loan Work for You?
Building a home is a huge but exciting decision that could ultimately result in a personalized home you’ll love for years to come. But financing the construction and subsequent mortgage shouldn’t be a complicated process. With a construction-to-permanent loan, you may be able to efficiently transition your funding to a traditional mortgage without the hassle and cost of two separate closings.
Before you decide to apply, however, speak with your lender to ensure a construction-to-permanent loan will work for your specific needs.
This information is intended for educational purposes only. Products and interest rates subject to change without notice. Loan products are subject to credit approval and include terms and conditions, fees and other costs. Terms and conditions may apply. Property insurance is required on all loans secured by property. VA loan products are subject to VA eligibility requirements. Adjustable Rate Mortgage (ARM) interest rates and monthly payment are subject to adjustment. Upon submission of a full application, a mortgage banker will review and provide you with the terms, conditions, disclosures, and additional details on the interest rates that apply to your individual situation.
