Mortgage Loans for New Construction

There are several loan types that can be used for purchasing and/or building newly constructed homes. Each has their own distinct advantages and disadvantages. When buying or building new construction homes, it’s important to weigh each of the pros and cons to each type of financing.

Straight purchase from a builder

Often times when purchasing new construction homes, a builder will give the buyer a choice: buy the lot, obtain their own construction financing and work closely with the builder (through the construction process) or have the builder buy the lot, build the home to the specifications of the buyer and then sell the home to them in a straight sale. When a buyer elects to use the latter of these two offers, the financing for the new construction is a simple purchase money mortgage of their choice. It could be any standard purchase money mortgage from Fannie Mae, Freddie Mac, VA, FHA, Rural Development or any number of numerous offerings in the jumbo financing markets.

The benefit of purchasing new construction on a straight sale from the builder is that the stress from obtaining and facilitating the construction financing is removed. Because it’s a normal sale, a reduced down payment is allowed. The detractor is that often times, the cost of the home in the end can be higher because homes are usually sold from the builder to the new homeowner at market price. Using other purchase and financing packages can limit the cost of the home to the cost of the land + the settlement charges of the construction financing + the cost of the build + the builder’s fees. Any homebuyer evaluating these options should carefully weigh the costs between these two methods of working with a builder.

Here is a brief outline of the straight sale process:

● Identify your building site

● Figure out what you can qualify for on your mortgage

● Choose your plans and specifications of your new home along with their associated costs

● Home construction starts

● When construction is nearly done, mortgage process starts

● Close on home sale

Construction – 1 time close

A one-time close construction loan, also called a construction to permanent loan is a type of mortgage that combines the actual construction loan and the permanent mortgage into a single loan. The benefits of this type of financing are that the financing process is less costly because there is just one set of closing costs. Additionally, the closing and modification are much simpler than the alternatives. The detractors are that, often times, the choices of loan products are more limited and some of the lock options have disadvantageous restrictions compared to other loan types.

Here is a brief outline of the one-time close process:

● Identify your building site

● Figure out what you can qualify for on your permanent mortgage and what the required cash/equity contribution will be

● Create your plans and specifications of your new home

● Choose your builder

● Review and edit plans and specifications of your new home based on the builder’s cost breakdown

● Start mortgage process

● Close on mortgage

● Home is built

● Mortgage is modified

Construction – 2 time close

A two time close construction mortgage loan allows you to independently negotiate the terms of your construction loan and your long term mortgage which under this structure, would be a simple refinance. Its detractors are that it is a more complicated process than any other option and there are two sets of closing costs. It has several benefits that are often overlooked. Some of those benefits include the following:

Sometimes allows for reduced cash contributions to the transaction
Allows for more loan program choices on the permanent financing
It is easier to manage construction cost overruns
Can allow for more flexible draw schedules during the construction
Allows for more flexible rate lock options
Works well for executive home custom builds using jumbo or super jumbo financing
Here is a brief outline of the two time close process:

● Identify your building site

● Figure out what you can qualify for on your permanent mortgage and what the required cash/equity contribution will be

● Create your plans and specifications of your new home

● Choose your builder

● Review and edit plans and specifications of your new home based on the builder’s cost breakdown

● Get preapproved for the loan that you’ll need and want for refinancing out of the construction loan

● When construction is nearly done, refinance mortgage process starts

● Construction is completed

● Refinance mortgage closes and construction loan is paid off

Each of these construction options has their respective strengths and weaknesses. Only a highly skilled and experienced loan officer can assist in weighing the options. One time and two time close construction loans are not simple to construct. Proficiency in each type of financing is a prerequisite for employment as a loan officer at iLoan. We look forward to putting our skills to work for you.