Construction Loan Questions Answered

When building a custom home on your land, you can finance your build in multiple ways. Various construction lenders offer two types of loans: one-time close and two-time close. Let's examine the similarities and differences between these two lending options.

Construction Loan Application

First, lenders offer different features in their loan offerings. Compare apples to apples when deciding which lender to use for your new home construction loan. Some may offer a lower interest rate, but your closing costs are higher; another may offer a higher interest rate but lower closing costs. Our two cents: ensure your lender and the construction loan representative you are working with are well-versed in construction lending. Providing financing for general real estate sales and new home loans, where the builder carries the construction financing, and all you need is to have your final mortgage in place once the home is completed, is much simpler than a construction loan. Your builder should have a few lender referrals to offer. You can also Google home construction lenders, read reviews, and ask other builders you are researching which lenders they recommend. The goal is to move forward with a lender who offers you the best value, not only in interest rate and fees but also in service. Having a lender who is not well-versed in servicing construction loans can cost you thousands of dollars and cause many headaches during your home build.

Similarities Between One and Two-Time Construction Loans

With a down payment for the particular loan and lender, both one-time and two-time construction loans typically involve financing your entire new home construction project. Some costs include land (if you do not already own land free and clear), permit fees, utility fees, house plan design, engineering of house plans, your builder's cost for building the home specified on your construction contract, landscaping, and anything else required to complete your construction project.

Pro Tip: If you have paid for fees before your loan funding, for instance, you purchased land previously with a land loan or paid to have home plans drafted and engineered, these costs, in most instances, when provided to your lender before funding, can be included in your construction loan. Ensure you inform your construction lender representative of the fees you have previously incurred before your loan funding!

Other similar features of both loan options include draws paid based on the stage of construction, interest-only payments during the construction phase, and paying interest only on the amount borrowed, not the entire project amount.

One-Time Construction Loan: What to Know

The most significant benefit of a one-time construction loan is that you only have to go through underwriting once. When home construction is complete, and your certificate of occupancy has been issued, your lender will provide it to you and modify your construction loan to a permanent home loan.

Two-Time Construction Loan: What to Know

With a two-time construction loan, as we explained above, most features are similar during construction; the key difference is that your construction loan does not transition into your permanent home loan. That can be a positive, as you could have been shopping for another lender to pay off your construction loan that might have more favorable terms for permanent house financing, so that gives you flexibility in still finding the best value for you. That being said, most who choose this route stick with the initial lender unless there is a valid reason or a significant difference in loan cost.

So, What Construction Loan Type Should Be Chosen for Homes Built On Your Land?

Every situation is different when financing homes built on your land. From down payment to credit score, the more down payment you have, the higher your credit score, and the more favorable your terms will be with any lender. As we explained earlier in this article, obtain lender referrals from reputable sources, interview each lender, and choose the one you feel most comfortable with. Trust yourself to make the right decision after researching multiple lenders, just like you will do when choosing a custom home builder. If you need help from VisionMaker Homes, please get in touch with us, as we are here to help at any phase of your homebuilding journey.

What Is Next in Learning More About New Home Building?

If you want to learn more about the option of building a new customized home on your land, even if it's just to explore if this is an option to consider, contact us by email at mybuilder@visionmakerhomes.com or give us a call at 971-900-9566 to learn more. We are here to help when you are ready!