From a buyer’s perspective, today’s home market can feel daunting. Finding the right house can be difficult and, to make matters worse, pre-approved borrowers often can find a home they love and make an offer only to be outbid. Many homebuyers wish they could take bits and pieces from houses they like and create their own custom-built dream home. Well, there is a way that mortgage originators can help them to do this.
Oftentimes, one of the biggest barriers that mortgage originators face in closing loans is the nationwide housing shortage. This past fall, there was just a four-month supply of homes on the market — which is the number of months it would take for the current inventory to sell if no new homes were added, according to the National Association of Realtors. A six-month supply is considered a healthy market.
The limitations created by this supply problem can be overcome, however. There exists a financing solution that allows homebuyers to get into the homes they’re longing for, while also allowing mortgage originators to seal more deals.
The single-close construction loan, also known as a construction-to-permanent financing, provides an avenue for borrowers to finance the construction of their dream home. Originators can close more loans by learning about and employing this useful financing tool.
Peace of mind
The single-close construction loan allows borrowers to easily combine financing for a lot, construction and mortgage into one loan. This methodology is best for the buyer who is looking into new construction. This financing path can provide low interest rates, low money down and just a single closing.
One advantage of a single-close construction loan is the interest rate is locked prior to the start of construction. That adds a welcome degree of certainty for the homebuyer.
A single-close construction loan can be offered with the same low-downpayment requirement that applies when buyers attempt to purchase an existing home. Builders, who typically require a 20 percent downpayment to begin construction, can afford to be more flexible because they benefit from an expanded pool of purchasers.
There are many instances in which single-close construction-to-permanent loan financing would be a viable solution for borrowers.
The single-close financing also can give builders peace of mind knowing that their purchaser is already approved for a permanent loan from a national lender. That allows them to build with confidence without deploying their capital to guarantee a bank construction loan for speculative development.
For homebuyers, the single-close financing route offers peace of mind because they can move forward without any interruptions or issues that may arise with other financing arrangements after construction begins. An added benefit is that the homebuyer only pays for one set of closing costs, which saves money in the long run.
Single-close construction loans also have permanent mortgages that close before construction begins. In addition, the fixed rates on the loan should not be subject to change during the construction phase, so there are no surprises.
How it works
Single-close-construction loans have come a long way in recent years. In addition to the expanded product guidelines, the software to manage the relationship and communication between loan officers, builders and borrowers has improved, making the process more user-friendly.
Keeping internal control of the process from start to finish allows mortgage companies to provide high levels of customer satisfaction. That, in turn, creates referral business for mortgage originators from satisfied builders.
The process of purchasing a home with a single-close construction loan is similar to a more traditional home-mortgage approach. It begins with a borrower’s pre-approval to ensure they meet the necessary requirements for the loan regarding credit guidelines and income levels.
Then, the borrower will need to work with a general contractor or builder for the property, and the lender must approve that builder. Site selection then follows immediately after.
The project also will then need to be approved, and the builder will usually send costs to the lender. That lender will then review construction plans, the costs and structure the loan based on those parameters.
Construction contingencies (usually around 5 percent to 7 percent) will be added to the loan, just in case of unforeseen costs that could arise during building. After these steps, the loan goes through closing, and construction begins soon after on the chosen lot.
Another feature of the single-close construction-to-permanent loan is that borrowers enjoy the ability to include construction-period interest — interest on the construction loan — in the total loan amount. That means borrowers do not have to be saddled with two house payments during construction, especially welcome for transactions involving higher loan-to-value ratios and for first-time homeowners.
Loan in action
Recently, a loan officer had a client who wanted to build a new home and would not have a sizable downpayment until the equity was released from their current home. Their dilemma?
Put their current house on the market and risk selling to a buyer who needed to move in before their new house was ready. Additionally, they would likely have to borrow the equity for a downpayment on the new home because their existing equity was tied up in their existing home.
The likely outcome would be two moves and extra expenses with the bridge loan. The solution to the problem is to structure a conventional, single-close construction-to-permanent loan with a 95 percent loan-to-value ratio. That avoids the necessity of two moves and extra loan-closing expenses for a bridge loan.
In this case, the builder released the lot to the customer and commenced construction. That is something the builder normally would not have done without a 20 percent downpayment.
In another case, a couple had enough income to purchase a $500,000 home with pre-approval. They were unsuccessful in their search for a house, however, because they had many requirements to suit their needs.
Their originator suggested a single- close construction-to-permanent loan for a new home, and they were able to successfully find a lot, contract with a builder and design a home that met their needs. In bringing their own financing to the table during negotiations, the couple was able to secure enough credit to add a pool to their dream house, which is something they had not originally planned to do until three to five years after moving into the home.
• • •
There are many instances in which single-close construction-to-permanent loan financing would be a viable solution for borrowers, specifically if they are building a new home on a vacant lot and are in search of financing.
Borrowers without lot of cash available for a downpayment or who are having trouble finding an available home that suits their needs also can benefit from this option.
