Construction-to-Permanent Loans

What Are Construction-to-Permanent Loans?

Embarking on the journey to build your dream home requires not only a vision but also the financial support to bring that vision to life. Construction-to-permanent loans bridge the gap between your dream and reality by financing the construction phase and seamlessly transitioning into a permanent mortgage once the building process is complete. Let’s look at this two-phase loan and why it might be the perfect fit for your home-building project.

Phase 1: Construction Loan

During the initial phase, the loan functions similarly to a line of credit. You only pay interest on the amount disbursed for the construction. Here’s a detailed breakdown of this phase:

• Flexible Draw Schedule: This type of loan offers a flexible draw schedule, giving you access funds as needed throughout the construction process.
• Interest-Only Payments: During the construction phase, borrowers make interest-only payments on the amount that has been drawn, which can lessen financial strain during building.
• Direct Payments to Builders: Funds are disbursed directly to the builders for work that has been completed, ensuring a smooth construction process without financial hiccups.

Phase 2: Permanent Loan

Once the construction is done, the loan becomes a permanent mortgage. This phase looks more like a traditional home loan structure. Key elements include:

• Fixed or Adjustable Rates: You can choose from a fixed or adjustable rate for your mortgage, based on your financial situation and preferences.
• Amortization Period: After moving to the permanent phase, the loan begins its amortization period, where you’ll start making regular monthly payments towards both the principal and interest.
• No Double Closing Costs: A significant benefit of this loan type is not having double closing costs. You only go through the closing process once, saving time and money.

Benefits of Construction-to-Permanent Loans

Embarking on the process of building a new home is undeniably exciting, yet it also comes with its share of complexities. Thankfully, construction-to-permanent loans are designed to remove some of these challenges, offering a seamless financial pathway from the foundation to the finishing touches. Let’s explore the benefits that make this loan type a popular choice for budding homeowners.

• Single Closing Process: One of the main benefits is the single closing process, which not only saves you a considerable amount in closing costs but also spares you the paperwork and time involved in closing two separate loans.
• Interest-Only Payments During Construction: The initial construction phase allows for interest-only payments, which can provide significant relief in managing cash flow during what can often be a financially taxing time.
• Direct Builder Payments: By making direct payments to builders, this loan type ensures a streamlined, hassle-free construction phase. It reduces delays and fosters a more collaborative relationship between you and your building team.
• Locked-In Interest Rate: Lock your interest rate before the initial closing. This can protect you from potential rate increases during the construction period, offering peace of mind and financial stability.
• Room for Customizations: Given that you are starting from scratch, these loans afford you the freedom to infuse your home with personalized touches, making sure that the finished product is perfectly aligned with your vision and needs.

Borrower Eligibility Requirements for Construction-to-Permanent Loans

When it comes to construction-to-permanent loans, lenders look at several criteria to gauge the potential risk and the borrower’s ability to repay the loan. Here, we’ve outlined the essential requirements that prospective borrowers should prepare for when considering this loan type:

• Credit Score: A robust credit score is a foundational requirement. Lenders prefer applicants who have demonstrated financial responsibility through a history of timely payments and a good credit score. Generally, a score above 680 is recommended, but you can still qualify with a lower score.
• Down Payment: Expect to make a down payment of at least 10%. A larger down payment can potentially secure more favorable loan terms.
• Debt-to-Income Ratio (DTI): Lenders scrutinize your DTI to ensure you have the financial capacity to manage the new loan along with your existing debts. Although we can sometimes go higher, aim for a DTI ratio of 43%.
• Detailed Construction Plan: Presenting a well-thought-out construction plan is pivotal. It should include timelines, materials, costs, and contractor details. This plan serves as a blueprint, illustrating the feasibility and solidity of your project.
• Appraisal and Inspection: An appraisal will be conducted to determine the projected value of the completed home, factoring in the details of your construction plan. Additionally, periodic inspections may occur during the construction phase to monitor progress and adherence to timelines.
• Proof of Income and Employment: Similar to other loan types, you’ll need to provide documents like recent pay stubs, tax returns, and proof of employment to verify your income and employment status.
• Reserve Funds: Lenders often require that you have reserve funds equal to a certain number of months of the loan’s principal, interest, taxes, and insurance (PITI) payments.

Builder Requirements for Construction-to-Permanent Loans

Navigating the path to your new home involves partnering with a builder who meets the stringent requirements set by lenders for construction-to-permanent loans. These prerequisites help ensure the timely and successful completion of your home project. Here, we will shed light on the specific criteria that builders must fulfill to qualify for these kinds of loans:

• Licensed and Insured: At the forefront, it’s imperative that the builder holds valid licenses and insurance. These credentials signify that the builder operates within legal parameters and maintains standards of safety and professionalism.
• Proven Track Record: Lenders often require that the builder has a proven track record of successfully completing projects similar to yours. A history of successful projects illustrates a builder’s competence and reliability.
• Financial Stability: We will examine the financial stability of the builder, including a background and credit check. A financially stable builder is less likely to encounter issues that could delay or halt construction, offering some peace of mind about the project’s completion.
• Positive Customer Reviews and References: Builders with positive reviews and strong references are often viewed more favorably. These testimonials can provide an insight into the builder’s work ethic, quality of craftsmanship, and customer service.
• Transparent Communication: Choose to work with builders who are transparent and maintain open lines of communication throughout the construction process. Effective communication can prevent misunderstandings and facilitate a smoother build.
• Permit Acquisition: The builder should be proficient in acquiring the necessary permits for construction. Their expertise in this area can prevent delays and ensure that the project adheres to local regulations and zoning laws.

How to Apply for a Construction-to-Permanent Loan

Apply Online

1. Visit the website: Go to the online mortgage application portal at Amres.com.
2. Complete the application: Answer some questions about your homeownership goals and personal information.
3. Gather Documentation: Prepare necessary financial documents, such as asset statements and tax returns.
4. Builder and Project Review: We will vet the builder and review the builder’s background information. We will review the project plans and specifications for completeness and feasibility.
5. Loan Processing and Approval: Amres will process the loan, conduct the appraisal, and provide a decision on approval.
6. Closing: After approval, you’ll proceed to closing. There, you’ll finalize the loan and become the proud owner of your new home.

Apply over the phone

1. Contact an Amres Loan Officer: Start by connecting with an Amres loan officer to discuss your needs and options.
2. Gather Documentation: Prepare necessary financial documents, such as asset statements and tax returns.
3. Complete Application: Your loan officer will guide you through the application process, making sure all details are accurately provided.
4. Builder and Project Review: We will vet the builder and review the builder’s background information. We will review the project plans and specifications for completeness and feasibility.
5. Loan Processing and Approval: Amres will process the loan, conduct the appraisal, and provide a decision on approval.
6. Closing: After approval, you’ll proceed to closing. There, you’ll finalize the loan and become the proud owner of your new home.

Conclusion

Construction to permanent loans offer an efficient way to finance the construction of your new home and transition into a traditional mortgage. With one-time closing, potential cost savings, and the ability to build a custom home, this loan type presents a compelling option for many homebuilders.

At Amres, our knowledgeable loan officers are ready to guide you through every step of the process. Contact us today to begin your journey towards constructing your dream home.