There are several different ways to finance a new custom home, most commonly, you would pick out a lot, and find a Builder who will build the home to your specifications. This “Custom Home” loan, or construction loan, would be in your name – and the builder would receive “draws” or lump sum amounts from us as the phases of the home are finished. Usually there are 5 “draws” on your construction loan during the process. With the new Construction Loan closing costs schedule we offer in NC, we only have one set of closing costs.
What does that mean?
Traditionally, customers looking to build a custom home would seek out a “Two Time Close” construction to permanent loan. With this type of loan, the customer would get a line of credit for the construction and once the home is complete; a permanent loan is taken out to pay off and close the construction loan. With a “Two Time Close” Construction Loan, the borrower must qualify twice, have the home appraised twice, pay two sets of closing costs and is subject to possibly rising interest rates.
This also opens up the possibility of not being able to qualify for the permanent loan due to higher interest rates, change of employment, lower appraised value on the second appraisal…etc. This can be devastating to a customer that just finished building their dream house! If the borrower is unable to qualify for the permanent loan, the borrower could possibly lose their new custom home in foreclosure!
Again, this schedule of Construction Loan closing costs requires TWO of everything, because it’s actually two loans. It also means that as mortgage interest rates are rising (which they are) you are not “protected” against higher rates.
How To Save Money On Construction Loan Closing Costs
The alternative? A Single-Close Construction to Permanent Loan. It is also referred to as a “construction to permanent Loan”, “construction to perm loan”, “CTP” and a “one time close” loan. This mortgage can be used to combine construction financing and permanent mortgage into one loan. Within the Single Close Construction to Perm family lies two types of products.
The first is a hybrid of sorts between the two-time close and one time close loan. You only close once, but there are a couple of drawbacks.
• Your interest rate is locked at application, however your final permanent rate is predicated on the market at time of conversion. The lender will give the borrower a cap to their interest rate assuring the final interest rate will be no greater than “X”. With this hybrid however, the borrower can also take advantage if interest rates have dropped and float down to an even better interest rate. In a decreasing interest rate market; this can be advantageous. In a rising interest rate market, one of which we are in currently, it is not.
• The other way to tell the difference between a “True One-Time Close CTP” and a hybrid is the Note. The Note on a hybrid loan will show 31 years instead of 30 years.
We don’t currently offer this option, as it’s not advantageous to our borrowers in a rising rate environment. We have a True One-Time Close Construction to Permanent Loan.
• You choose your final/permanent rate up front, lock it in and close with that rate. The mortgage rates for this program is generally 1/4% higher than the going Conventional Mortgage Rate.
• Upon completion of your new custom home, you DO NOT have to update any financial documentation, re-qualify or have another appraisal completed. Upon completion, you simply roll into the permanent rate and begin paying on your loan.
• Upon completion, you will be notified of your new payment (amortized over the remaining term [360 months – time to build] and no fees are due.
• If the you do not draw the full balance, we will reduce the loan balance and recast (re-calculate the monthly payment) based on the new balance. Additionally, the borrower may elect (at any time after the home is built) to pay down the principle balance and request a “recasting” of the payment.
We do not have the ability to loan you MORE money, this is one of the reasons that we want to be sure you have your plans TOTALLY complete before we start. There will invariably be some additional costs in building a home. These additional monies will be coming out of your pocket, and will affect your Construction Loan Closing Costs. If you decided on Carrera Marble in the bathroom, and you don’t have that in the plans (or the budget), then the money will need to come from your reserves. In general we want to see that you have at least 3 months of reserves left over after closing.
We also require a 10% down payment, and in some cases, we only require a 5% down payment. Most of the banks in NC making a one time Construction to Perm loan require at least 20% down payment. They ALSO require you to have at least 3 to 6 months of reserves. So if you are buying a $300k custom home, and using BB&T – you will need a 20% down payment (or at least $60,000) plus 3 months of total payments in Reserve (assuming your payment is $2400) that means you need an additional $7200. That means to build your $300,000 home, you need almost $70k in cash!
That’s a lot of money to put together for a $300,000 custom home. Our required Construction Loan Closing Costs are generally HALF of that. Now, to be frank, both our program and BB&T require good credit. What does that mean? We can do 10% down payment down to a 680 credit scores. For those with Credit Scores between 680 and 719 we need a 10% down payment and 6 months of Reserve Payments verified. For those with 720 credit score or higher, we can accept lower down payments and only 3 months of Reserve payments verified
Building a custom home requires means there are many moving parts, it can be complicated – but it doesn’t have to be! Call Steve and Eleanor Thorne 919 649 5058 and find out how much your Construction Loan Closing Costs will be on your “dream” custom home!
Originally Posted at NCFHAExpert.com