If you want to build your home from the ground up on your own lot, you have plenty of options, starting with a choice between a construction loan with two applications, two loans, and two closing dates and a loan that only has a single application, one loan, and one closing date.
The loans that require only one application and closing date are known as One-Time Close construction mortgages.
They are also known as construction-to-permanent mortgages. The loans that require two of everything are simply known as construction-only loans and you must apply for the mortgage loan separately from the construction loan.
What are the basic benefits of choosing a One-Time Close loan aside from the obvious? Your ability to have single loan approval and one closing date are important. But just as critical?
Knowing that interest rates for a construction-only loan may be higher, for example, might change your mind about that option knowing that One-Time Close loans may be more competitive.
For a construction-only loan the following costs may be covered by the loan:
- Land acquisition costs
- Contractor labor
- Building materials
For these two-close loans, the lender may require you to have a cash reserve. Part of the motivation for this is that borrowers sometimes change their minds about the project once it is planned. They may wish to have upgraded kitchens or bedrooms or may want better siding.
Whatever the reason, the cash reserve issue is an important one to consider when saving for the mortgage. A cash reserve may be required for a One-time close mortgage, too but the overall fees for a construction-only loan may be higher and that could eat into those reserves.
A One-Time Close loan may be less expensive because you only have one set of closing costs to pay. Having only one set of settlement fees is a big help in the cash reserve department and can help you save money on the loan overall.
And having only one closing date sidesteps the “what if?” issue of having a construction-only loan, getting through the construction phase but then having trouble qualifying for the second loan (the mortgage).
That situation can happen if you lose your job between the two loans, or if your financial picture radically changes.
No matter which loan option you choose, it’s good to remember that building a home takes longer than buying existing construction. It does not pay to be in a hurry when choosing your construction loan options, give yourself plenty of time to let the construction project finish for best results.
You may have to take into consideration some important variables including how COVID-19, supply chain issues, and related problems may have affected the construction market in your area.